The Federal Reserve just released a proposed rule that would limit the size of US banks. Apparently the rule would not effect the banks as they stand right now,  but would only come into force if two of the country’s financial institutions were to merge. The proposed rule would implement section 622 of the Dodd-Frank Act.

There may be some argument about the necessity of such a rule, and those in the banking industry are sure to argue that it adds unnecessary rigidity in a time of capital accumulation among large banks in China. The Fed is seeking comment on the rule, and has set a date of July 8 by which comment should be made.

Federal Reserve limits bank size

The rule, according to a release from the Federal Reserve this afternoon, “prohibits a financial company from combining with another company if the ratio of the resulting financial company’s liabilities exceeds 10 percent of the aggregate consolidated liabilities of all financial companies.” It simply means that a single entity attempting to build its existence through merger, cannot hold more than 10% of the capital.

Given the activity of the Federal Trade Commission in judging the anti-competitive nature of mergers, some in the financial industry may argue that the attempt rule by the Fed is redundant and reduces flexibility in the industry. Given the changes in the power structure of the financial industry clear since China’s economy began to increase in size, it’s not wonder that banks in the US do not want their size limited.

Bank size a hot button topic

The Dodd-Frank bill was ferocious in its complexity and brought a ream of different regulations to bear on the US financial industry. Unfortunately the implementation of many of the limits in the bill has been difficult, and many, including the limit on the size of merged banks, have spent time languishing in a desk drawer waiting for the interest of a policy pusher.

The financial crisis of 2008, and the subsequent government bailouts of a substantial part of the US banking industry, brought with it a wave of arguments against an industry built on a too big to fail mentality.There have been several proposals to break up the large banks in the United States in order to create a sector that is more competitive, and less structurally dangerous.

Those in the sector, and those arguing in its interest, have said that accumulation is the only path that the Banks in the US has given the growing strength of international banks. Several analysts and executives have warned of the country losing a competitive edge if its banks are no longer able to stand among the biggest in the world.

With the proposal of today’s rule, the Federal Reserve has likely brought that idea out into the open once more. Janet Yellen may have to speak about her feelings on the topic, departing from a reign spent worrying about interests to get more involved in the manual and direct regulation of the banks.