Recently, the FDIC approved a one time emergency fee to all banks. It's a 0.2% levy, essentially $0.20 for every $100.00 in deposits a bank holds. This is because with so many banks failing, the FDIC is dangerously depleted. This is in addition to their normal 0.14-0.16% levy that's paid annually. There is now talk of increasing the levy permanently, and making it bigger the bigger the bank is.
That's a start, but we truly need to start doing more to disincentivize growing into a megabank, while making these giants pay for the risk they impose on you and me. Tier 1 capitalization is a good starting point.
Tier 1 capital is basically the bank's emergency money. If there are losses, they're paid out of tier 1 capital. By international standards, if you have tier 1 capital equal to 6% of your liabilities, you're well capitalized. These figures and their definitions were worked out in 1988, and I suppose works well during normal economic times and for smaller banks.
Let's instead think about Citigroup. Citigroup has nearly $2 trillion in deposits. If it were to fail, that's a serious blow to our economy, approximately 1/7 to 1/6 of GDP in that one bank alone. Of course, they have assets to make up for some of that, but do they have enough? Clearly, the answer is no, which is why their stock is now a penny stock.
So why should they be required to have only 6% tier 1 capital? For a bank that can have that outsized an effect on our economy, they should clearly have much greater reserves. And the larger a bank is, the greater it's reserves should be. When you start approaching too big to fail, we should be requiring tier 1 capital approaching 20%. If we had done that as Citigroup grew into the behemoth it has, it probably wouldn't have gotten so big in the first place, and even if it had, the current crisis would be no crisis. They'd take a huge hit to their balance sheet, it would be painful, and they'd spend a very long time rebuilding their tier 1 capital. Their stock would suck, but you and I wouldn't have put tens of billions of dollars into their coffers to make up for their losses. Wouldn't that be nice?
Another way to disincentivize would be to require higher levels of lending standards. There's no way to do this directly, but for instance, the greater a bank's deposits, the higher the credit score and income necessary for a mortgage to be purchased by Fannie and Freddie. We could also lower the rate at which we insure deposits as they increase in size at one bank. This would encourage large depositors to spread their deposits around, lowering their own risk, and increasing competition among banks. These are just a few ideas, but whatever we do, we must encourage banks to remain smaller, or pay a high price for their growth.