Changing the banking system

Before the recent fad of encouraging a small number of large banks, we had a large number of small banks. To enjoy the economies of scale The number of banks declined during the 90's and continued in this century. We have now re-discovered the problems with large scale banking. If they make a mistake, they can bring down the whole economy. As the result of the large scale failures of banks in the thirties we created a system of smaller financial institutions of various sorts and limited banks to specific activities, Glass-Segal that separated lending functions from investment functions. Earlier home lending was done by savings and loan associations that further divided the lending business. In the 80's savings and loans were allowed to make more than home loans. This resulted in a massive failure of S & L's. This lead to more concentration of lending functions in a smaller group of banks. At about the same time several states eliminated prohibitions on interstate banking further concentrating the business. Then the concept of the bank "too big to fail rule" was developed that gave the large banks a huge advantage over small banks. It also created a moral hazard. Large banks could behave in a reckless manner knowing if they made a mistake they would not pay the price of the market place, dissolution. The time has come to reign in the large banks. There is an advantage of having a large number small players in an economic area. It is less likely that an unexpected event will affect all of them equally.