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Should Government Place Limits on Bank Sizes?

During the recent recession, one of the most debated issues was the government bailout of some of the nation's biggest banks. The argument was that banks had gotten too big to fail, but not all banks were lucky enough to have the U.S. government step in and save them.

As the nation continues to recover, we are once again seeing banks grow in size, and the discussion of whether or not their growth should be limited are starting to surface.

On the side of limiting size is Dallas Federal Reserve Bank President Richard Fischer. Mr. Fischer believes that forcing some of the big banks to break up is the best way to avoid the future need of government bailouts, and he is taking his argument to friendly crowd at the year's Conservative Political Action Conference.

Republicans are typically opposed to any sort of government bailout, so his arguments are likely to fall on receptive ears. Mr. Fischer has been very vocal on the issue of “too big to fail”, earlier this year stating that if big banks were forced to break up into much smaller pieces that if they ran into future trouble it would be easy to allow one unit to be disposed of in bankruptcy without having to pull down the entire bank, forcing government intervention.

Mr. Fischer is not alone in his views. Several big banks have been dealing with shareholder pleas for more influence over their size. JP Morgan (JPM), Citigroup (C), Bank of America (BAC), and Morgan Stanley (MS) have all be facing the possibility of shareholder votes on whether or not they should be broken up.

Regulators came down on the side of the banks yesterday, posting letters it sent to each bank that agreed with bank lawyers that they did not have to have shareholder votes to explore the possibility of breaking up the companies.

This is a debate that we are going to start hearing more and more about. It is a tricky subject, and there are arguments to be made on each side of the debate.

While it is obvious that the bigger a bank gets the more necessary it would be for the government to bail it out of any future trouble, do we really want to hand the government the ability to set size limits? What is a better option… to allow the government to control a bank's size, or to expect the government to bail out the banks because they are too big to fail?

It is not an easy question to answer. While I do not like the idea of government having any involvement at all in the private sector, I agreed with the bailouts. At the time the bailouts were made the U.S. economy was in such bad shape that a couple more bank failures could have been the straw that broke the camel's back.

Of course, we never got to see exactly what would have happened had the government sat on the sidelines and allowed the market to take care of itself. Perhaps they should have been allowed to fail. Perhaps this is the nature of business, and the economy would be stronger today had Citigroup or Wells Fargo gone down the same path as Lehman Brothers.

As it turns out, the government did step in to save the banking industry, and five years later the economy is improving, and the stock market is hitting new highs. Does this mean everything is perfect? Of course not, but the economy has found its footing and is moving in the right direction.

If I had to be on one side of the debate I would argue that government should not have the power to place limits on a bank's size. It goes against everything I believe government is entitled to do, and I simply do not want to see it stepping in and having that sort of power. I don't like the idea of government bailouts either, but I believe it’s the lesser of two evils in this situation.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.