Here is the Dallas Fed’s report that argues for breaking up the large banks in order to end “too big to fail.” Very interesting reading. My view (blogged about before) is that it is not enough to break up the large banks. A sector that is critical and comprised of many small firms is not immune to the TBTF problem. If banks all do a similar activity and are exposed to similar risks, then they all go under in response to the same losses in the same state of the world and the sector needs bailing out. No firm is too big to fail, but if the sector just is too important to fail, then the concern is similar exposures as much as size. That said, there is still an advantage to breakup, which is that the worst offenders can be allowed to fail, which may push the crowd back somewhat from the brink.
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