In fact, while in 1999, the five largest US banking organizations had about 38 percent of total banking assets, the top five banks today have 52 percent of all bank assets. Prof Simon Johnson, writes about the TBTF hazard posed by the $900 bn giant, Goldman Sachs,
"If a bank like Goldman were in trouble, there remain the same unappealing options that existed for Lehman in September 2008 – either to let it fail outright or to provide some form of unsavory bailout. The market knows this and most people – including everyone I’ve spoken to in the last year or so – regards Goldman and other big banks as implicitly backed by the full faith and credit of the United States Treasury.
This lowers Goldman’s cost of funds, allows it to borrow more, and encourages Goldman executives – as well as the people running JPMorgan Chase, Citigroup and other large bank-holding companies – to become even larger."
Permitting TBTF institutions to fail, an orderly winding down through a resolution authority, while theoretically appealing, is not practical,
"But the resolution authority would not helpful in the case of Goldman Sachs, a global bank that operates on a vast scale across borders. Such a case would require a cross-border resolution authority, meaning some form of commitment among governments. As this does not exist and will not exist in the foreseeable future, Goldman is, as a practical matter, essentially exempt from resolution."
In this context, given the aforementioned, there are only two options - break up the TBTF institution or raise reserve capital requirements steeply. The former, while the most appropriate policy choice, stands no chance of success given the lobbying power of the banking industry. As Simon Johnson writes,
"Given that this is the case, the only reasonable way forward is to follow the lead of Prof. Anat Admati and her colleagues in pressing hard for much higher capital requirements for Goldman and all other big banks. If they have more capital, they are more able to absorb losses – this would make both their equity and their debt safer."
But the Basel III, which look likely to raise capital requirements to no more than 10 percent of Tier 1 capital, does not go far enough on this. This is despite the bankers arguement that equity is expensive (and possibly harmful to the banking industry's innovation and growth potential) being fairly comprehensively refuted by many leading finance academicians.
The final word on TBTF moral hazard should go to Neal Barofsky, the outgoing inspector general for the Troubled Asset Relief Program (TARP), who said in his final testimony before the Senate,
"For all its help in rescuing the financial system from the brink of collapse, TARP may have left a truly frightening legacy. It has increased the potential need for future government bailouts by encouraging the 'too big to fail' financial institutions to become even bigger and more interconnected that before, therefore increasing their ultimate danger to the financial system."