Size matters. But is bigger better in banking? That is the key question behind the recent rush to mega mergers in the banking industry. As banks approach the $1 trillion mark in size, the benefits are clear: cutting costs, improving technology, and cross-selling products to more customers. But so are the problems.

Regulation becomes more problematic. Consolidation is doubling the number of TBTF (too big to fail) banks that regulators in the past have kept alive no matter what the cost to taxpayers. According to the Federal Reserve Bank of Minneapolis, there were 11 TBTFs in 1984 with assets of $38.2 billion or more. By 1997, the number had reached 21 and was growing. Why so much consolidation? Banking industry assets are barely growing. There is now more money in mutual funds than in bank deposits. The result? Banks are leveraging their asset base more than ever.

To recapture their historic position, banks are linking up with partners in insurance and equities. Convergence mixes all kinds of assets--stocks, insurance, consumer loans, corporate finance, mortgages--into one financial stew. The result? Big though they may be, banks are riskier enterprises than ever before.

Record-high stocks, the "cheap" money of the '90s, make bank mergers appear relatively painless. They aren't. Problems are inevitable, and Washington should begin to protect taxpayers from a replay of the 1980s' savings and loan crisis. Shareholders and managers shouldn't be saved simply because their banks are TBTF. The Minneapolis Fed's suggestion that Congress amend legislation to cut back the de facto government guarantee for uninsured depositors and creditors is a good start. It shifts the burden of risk from the taxpayer to those big players capable of monitoring bank behavior to protect their own interests. It's also time to merge the agencies overseeing banking. Size changes everything.

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