David Cho has a generally good front page article in the Post today on the increased concentration in the banking industry as a result of the crisis. It would have benefited from some voices who are critical of the Obama administration's plans for regulating "too big to fail" institutions. As the article correctly explains, too big too fail banks get subsidized by the government, since lenders know that their loans are effectively insured by the government. This allows these banks to borrow at a lower cost, giving them an enormous advantage over their competitors. The article quotes Treasury secretary Timothy Geithner's explanation of the Obama administration's plans to offset this advantage with increased capital requirements. It is questionable whether these restrictions will be efficient. The most obvious test of the effectiveness of such restrictions would be if banks voluntarily break up to avoid them. In principle, the restrictions should be sufficiently onerous that they would eliminate any benefit from a bank achieving "too big to fail" status. Therefore, at least some banks in this category should find it beneficial to break up into smaller banks to avoid the restrictions. If the Obama administrations proposals are put in place, we will have the opportunity to see if the restrictions pass this test.
--Dean Baker
