Banks 'Too Big to Fail' Could Get Bigger

As lawmakers debated how to overhaul financial regulations, their mantra was that, if nothing else, the era of "too big to fail" was over. Never again would taxpayers have to rescue the largest banks to stop them from capsizing the entire financial system. By the time the Dodd-Frank financial reform law was signed in mid-2010, 10 banks controlled three-quarters of all banking assets, up from 68 percent in 2006, in part because big banks had scooped up troubled institutions. "Very large, systemically significant institutions were at the heart of the crisis," says David A. Moss, a Harvard Business School professor.

So it's all the more surprising that federal agencies putting the reforms into force are writing rules that strengthen the dominant position of the biggest banks. The Federal Reserve, for example, issued regulations meant to curb commission payments that gave mortgage brokers an incentive to steer homeowners to risky mortgages, but those rules could also make it easier for large banks to dominate the mortgage market. During the housing bubble, brokers often earned more by selling high-cost loans, even if borrowers qualified for lower rates. The rules now in effect require loan officers to be paid a salary and prohibit commissions tied to a loan's interest rate. No doubt regulations are needed to protect home buyers from unscrupulous practices, but the Fed's rules could deliver a fatal blow to mortgage brokers, who help homeowners shop for mortgages among different lenders. Like stockbrokers, they earn most of their compensation through sales volume, not salaries. Brokers increasingly have been spurned by big retail banks, which rely on branches and building salaried sales forces, says Guy Cecala, publisher of the trade paper .