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The largest commercial banks in America, the ones that are too big to fail, each control between one and ten percent of total bank deposits. One way to make them less of a risk to banking and the economy is to limit how big they can be. There's no economic need for any bank to have more than one percent of total deposits. That one percent limit would be roughly $100 billion in deposits. The only business borrowers who are big enough to hit the lending limits of a bank with $100 billion in deposits or even $50 billion don't bother to borrow from banks any more. They use bonds and notes sold directly to institutional lenders to get their large loans taken care of.

The Fed could set a hard limit of $100 billion in deposits, but I can imagine any number of problems (possibly a five year court case that the Fed might lose), but there are two other ways to make it economically impossible for a bank to want more than $100 billion in deposits: FDIC insurance restrictions and extremely tight capital requirements for banks with more than $100 billion in deposits.

Insurance restrictions could be simple, either kick the bank completely out of the FDIC and have them post large notices at every branch and web page that the FDIC does not insure any deposits at this bank or cap total deposit coverage at 1% of total covered deposits and force the banks to have that message at every door and website.

Either way, the next step is to have the Fed set a sliding scale of capital requirements for banks, on this order: Banks with less than 0.5% of total deposits ($50 billion or less) would need only meet the current capital requirements that banks are subject to. Those with $75 billion would have their capital requirements doubled. Those with $100 billion would need five times as much as the current tier one and two capital requirement. By the time the bank gets to $150 billion, they would need one dollar of capital for each dollar of deposits, a point that no banker would want to reach.

Sure, if we made this commitment to breaking up the most dangerous banks, we would see roughly three dozen banks if they try to go for max or six dozen if they go to the most reasonable large size replacing the ten largest, but none of those banks would pose anything like the risk they pose now.

Too big to fail is too big. Banks need to be broken up.

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