Thoughts On Simplicity: Bank of America Corp (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc (C)

This also ignores the reality that, while the biggest banks did pose a particularly ominous threat as they teetered on the edge of failure, there was a significant number of smaller banks that failed. One hundred and forty FDIC-insured banks failed in 2009. Another 157 were shut down in 2010. And 143 joined the ranks during 2011 and 2012. The country’s biggest banks did not have a monopoly on mismanaging their balance sheets in the years before 2008.

In concept, I like the idea of keeping things simple. But I think there are also hidden risks in the simplicity here. For one, I can’t help but wonder if this will actually encourage risk taking from some banks. If you essentially say that Wells Fargo & Co (NYSE:WFC) has to maintain the same amount of capital as Morgan Stanley (NYSE:MS), despite vast differences in their balance sheet composition, you may be implicitly telling Wells to amp up the risk it’s taking.

We also need to recognize that, sometimes, more complexity is beneficial. A decade ago, I was working on mostly desktop computers, and could easily open one up to swap out and upgrade components. Today, the miniaturization and complexity of a laptop’s innards mean that I can no longer do that. But laptops don’t make me panic — I’d say that I’m better off for having the laptop, complexity and all. Mortgage-backed and other structured securities might as well be four-letter words today, but there’s value in having relatively complex risk-distributing products like them.

Finally, for all the ballyhooed simplicity, I see this bill as trying to sidestep the simplest solution of all: allowing failure. In attempting to load the banks up with so much capital that they “can’t” fail, we run the risk of creating a dangerous implicit assumption.

Banking is a business best done with a conservative hat on. But at the same time, every time a loan is made, a banker is taking a risk. Fifteen percent capital buffer or not, mistakes will be made. When that happens, the bank that made the mistakes should suffer.

In the end, it’s not about an 8%, 15%, or 25% capital buffer. It’s about having a banking system where a bank that gets it wrong can fail without bringing down the entire system. If some banks truly are so big that we can’t possibly have them fail, then we either need to tweak the system so that they can safely fail, or stop pussyfooting around: just break them up.

The article Our Simplicity Fetish in Banking originally appeared on Fool.com and is written by Matt Koppenheffer.

Matt Koppenheffer owns shares of Goldman Sachs, Bank of America, and Morgan Stanley. The Motley Fool recommends Goldman Sachs and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, JPMorgan Chase & Co (NYSE:JPM)., and Wells Fargo.

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