“Put all your eggs in one basket, and then watch that basket.” Andrew Carnegie, in 1885 addressing the students of Curry Commercial College of Pittsburgh, Pennsylvania.
Without writing a book in response, I’m not sure that “too big to fail” isn’t the better alternative.
Nearly one in four U.S. banks (465 in total) failed between 2008 and 2012.
Citibank was (probably) the only Money Center bank dependant upon the U.S. government to remain solvent.
Banking has greatly changed over the years because the behavior of depositors has changed. Whereas historically we kept our liquid net worth in a savings account at the First National Bank of Our Hometown, today we keep the bulk of our cash at Schwab or Fidelity.
As such, I’m not sure that we need a zillion small banks.
As a free market capitalist I’m not completely comfortable advancing this idea but given that the Treasury has $14tr in outstanding securities, I could envision National Banks that make no loans at all, invest all deposits in Treasuries and in turn, offer unlimited caps on FDIC protection.
If depositors demand higher rates, they can bank instead at institutions that take additional risk, pay higher interest but forego the full backstop inherent to the FDIC.
That said, banking/lending aren’t the arenas of future systemic risk. The Big Can of Worms is indeed property insurers in areas prone to hurricanes and earthquakes.