This week, the New York Times editorilized about Citibank’s exit from the bailout program.  Although this seems to be good news on the surface, they note that in fact, our financial system is creating ever bigger banks, rather than breaking them up so that none remain “too big to fail.”

The editorial explains that the banks’ “main motive [in leaving the bailouts] is to get out from under the bailout’s pay caps and other restraints. The Treasury Department’s approval is a grim reminder of the political power of the banks, even as the economy they did so much to damage continues to struggle.”

Furthermore (emphasis added):  “The truth is that the taxpayers are still very much on the hook for a banking system that is shaping up to be much riskier than the one that led to disaster. Big bank profits, for instance, still come mostly courtesy of taxpayers.”

The NYT – along with AFR – hopes that the Wall Street Reform and Consumer Protection Act becomes stronger as it moves through the Senate to address this ominous problem:

If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the nation is moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.

The White House’s proposal to overhaul financial regulation has ideas for banks that are too big to fail. The House passed a bill last week that would require big banks to have bigger capital cushions to absorb losses. It gives the government authority to seize and dismantle big financial firms at imminent risk of failure and mandates banks to pay for a $150 billion fund to cover the costs of any future mess. It grants regulators authority to limit the operations or even break up big banks deemed too risky, even if they appear healthy.

These provisions still seem vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities.

If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist.

(Photo:  dystopos)