Kevin Drum, who's been skeptical about reforms to limit bank size, is intrigued by William Buiter's proposal to accomplish much the same thing by enacting regulations that increase capital requirements as banks grow in size. "This accomplishes two things," says Kevin. "(1) it puts natural downward pressure on bank size since higher capital requirements reduce leverage and profitability, and (2) if a bank gets big anyway, the higher capital ratio makes it less likely to fail and cause systemic problems." Drum pronounces this reasonable, and I'd agree. The potential problem is political: Mega banks, which this proposal preserves, will, in a decade or so, sic their armada of lobbyists on these regulations. And it's pretty easy to see how they could be quietly loosened in a way that rendered them essentially meaningless even as the changes didn't force a battle over full repeal. Size caps, which would both make for smaller banks and force a more simple and media-friendly argument if they were changed, might prove a bit more robust over the long-term. On the other hand, it's not clear that you could pass a size cap even in this climate. Buiter's approach, conversely, seems like an easier sell.
