During the Global Financial Crisis of 2008-09, the phrase “Too Big To Fail” became a part of the regulatory and political lexicon. Ending TBTF was the purpose of a new statutory framework under the Dodd-Frank Act, culminating in a new approach to resolving banks. The largest banks now issue trillions of dollars of convertible debt; there is an established legal process for converting that debt to equity upon failure or near-failure; and that debt is issued and traded at prices that assume that it would bear loss should the institution become troubled and fail. As a result, talk of TBTF has greatly and rightly receded.
Recently, though, some have begun to sound warnings over a purported successor to the TBTF problem: “Too Big to Manage.”  TBTM advocates generally argue: (i) banks have grown larger and more complex, (ii) increased size and complexity can make a bank too big to manage – not just by its current management team but, by definition, by any management team, and (iii) the government should decide when a bank has crossed the TBTM Rubicon and dismember it.
Below, we attempt to determine what is meant by TBTM and point out critical misconceptions along the way.
Complexity Has Its Benefits
TBTM proponents fail to acknowledge four vital facts about complexity.
First, complexity is generally accompanied by diversification. Both actual experience across innumerable industries and the Federal Reserve’s annual stress tests for over a decade have confirmed what they teach in Finance 101: diversified firms outperform undiversified ones, earning higher returns with less risk. Furthermore, in banking, the GSIB capital surcharge is expressly designed to reduce the chance of default at a systemically important bank commensurate with its system importance (another way of saying complexity). There is simply no question that the default risk at a large, diversified bank is smaller than at a small bank.
Furthermore, different business lines within a diversified firm employ different management teams. So, at a large bank, the people running the consumer bank do not also run the investment bank or the asset management division. Even within a consumer bank, a different group manages the credit card division and the deposit-taking division. The job of running the credit card division at a large, diversified bank is no more or less complex than running the credit card division at a standalone credit card bank. Similarly, the massive teams of risk and compliance teams are also separated by division. So, if a credit card compliance team in Columbus is dealing with an error in reporting the bank’s APR on its credit card statement, this work in no way detracts from the ability of the compliance team in London to monitor dollar-sterling swaps.
Certainly, some central corporate functions do become more complex as a firm diversifies — technology services, financial reporting and, increasingly these days, capital allocation, which is now driven as much by shifting regulatory mandates as firm strategic imperatives. That said, there is no record of anyone saying that inefficient capital optimization is making banks TBTM.
Second, modern finance comes with substantial benefits for American businesses and requires large, diversified banks to provide those benefits. Major American companies operate around the world; they are complex institutions. To succeed, they need American banks that can provide them loans and underwrite debt securities; they need custodial services, both domestically and abroad; they need to hedge their interest rate and currency risk; and they occasionally need to raise capital. A coalition of community banks is not going to provide those services. So, complexity serves not only the safety and soundness of the bank but also its customers, and the economy as a whole.
In particular, U.S. officials have boasted about how broad and deep capital markets fuel U.S. economic growth. Our capital markets are the envy of the world; witness the European Union’s ongoing effort to replicate those markets. Those efforts have been largely unsuccessful primarily because capital markets are complex. They require a system of laws, a culture, and a significant amount of expertise exercised by a significant number of people.
Third, taxpayers are now massively insulated from the risks of large financial firms. On average, the U.S. systemically important banks fund themselves with only 30 percent in insured deposits and Federal Home Loan Bank advances – half the percentage of community banks. Meanwhile, the systemically important banks hold on average 30 percent of their total risk-weighted assets in total loss-absorbing capital – equity and debt that converts to equity at or near failure. They also hold 21 percent of their total assets in high quality liquid assets. Thus, the chance of a mismanagement-induced loss depleting that capital and liquidity is microscopically small, and smaller than ever before.
There Is No Evidence that Effective Management Becomes Impossible at Some Size or Complexity Threshold
In evaluating the TBTM notion, semantics are important. One must carefully consider the difference, then, between (i) a poorly managed big bank and (ii) a bank that is too big to manage any way but poorly.
For a poorly managed bank, Congress has established numerous tools for redressing the problem, described in an accompanying note. The notion of a bank that is too large or complex to manage any way but poorly, on the other hand, is an unsupported theory. It means that given the bank’s size and business structure, any management team would fail. And it also implies that any similarly sized and structured bank would also be incapable of being managed. Finally, it requires a belief that government examiners are qualified to distinguish between a poorly managed big bank and a bank too large to be managed anything but poorly. There are reasons to be skeptical on all fronts.
First, perspective. In a variety of industries, boards of directors have concluded that a “conglomerate effect” was making the firm inefficient, and therefore that selling or spinning off a division would bring shareholders greater value from the parts than the whole. While ultimately a board decision, such a step is driven by shareholders, creditors, and counterparties. In no other industry would regulators presume to make that decision for them.
Of course, banks are different from other commercial companies, because some bank liabilities are insured by the taxpayer, and a bank’s failure is more likely to present systemic risk. But by all accounts — including those of regulators — large U.S. banks are in extraordinarily good financial condition, and thus exceedingly unlikely to fail at taxpayer expense or market upset. Large banks hold extraordinarily high levels of capital and liquidity. No bank’s management has been cited for failing to earn sufficient returns or failing to capitalize the bank adequately. The Federal Reserve’s stress tests confirm that they can weather extraordinary shocks; so, too, did the real-world stress test of 2020.
Rather, those criticizing bank management have focused on consumer compliance violations and governance and control issues identified in the examination process. But it is difficult to understand why these issues would merit the dismemberment of a bank any more than a non-bank – whether that be a pharmaceutical company or a defense contractor or an agribusiness. And of course the consumer protection laws come with a quite specific set of penalties, not to include divestitures or growth limits.
Second, expertise. It is not at all clear why a government examiner would be better able to distinguish poor management from a structure that made good management impossible. One wonders whether government examiners would have concluded in 1997 that, with billions of losses under three consecutive CEOs, Apple Inc. was too big to manage, and that there was simply no point in allowing Steve Jobs to return as CEO. Would government examiners have concluded six months ago that Disney – losing money and faced with the “reputational risks” that particularly concern banking regulators – was too big to manage?
Third, and most importantly, the potential for mischief. In discussing too big to manage, the Acting Comptroller of the Currency recently complained of the “unwillingness” of senior leaders at banks to resolve “control failures, risk management breakdowns, and negative surprises.” He also decried the “immateriality illusion” and the “bad apple illusion,” meaning that any issue identified by a bank examiner could and perhaps should be considered material, as a warning sign.
Thus, the risk here is that a federal banking agency would not assess whether a firm is too large to be properly managed by assessing historical evidence, market performance, financial strength and the oversight and judgment of its board but rather whether the firm is being managed in compliance with examination mandates, many of which are non-public. TBTM would inevitably become UTC — unwilling to comply. And with dozens of full-time examiners at regional banks and hundreds at the largest banks – with heavy incentives to identify problems rather than give passing grades — one can expect a steady torrent of compliance mandates to continue.
Consider, then, the most recent supervision report from the Federal Reserve in November 2022. It reports that fewer than half of large U.S. banks are in satisfactory condition. That is an incredible statement. It would be difficult to find any analyst or investor anywhere in the world who believes that to be true; every datum on capital or liquidity or earnings suggests otherwise; the Fed’s own stress test demonstrates otherwise; and senior Fed officials have repeatedly and accurately reported on the extremely strong condition of the U.S. banking industry. And there was no market reaction – or really, any type of reaction – to the report. Of course, that is because it is broadly understood that the report’s definition of condition is not really focused on financial condition anymore; it is largely about documenting and complying with examiner-mandated policies on governance and internal controls, and with compliance with examiner mandates in general.
Fourth, where is the research?
It is worth pondering what evidence actually could suggest that large, complex banks are more poorly managed than small banks or non-banks – to the point of being unmanageable by anyone. For perspective, some math. A bank with 100 times the assets, customers and employees of a second bank presumably would have approximately 100 times as many compliance problems, if the banks were equally well managed. Is there evidence to suggest large U.S. banks have proportionately more problems than small banks? Also, do large banks have more operational problems than similarly sized non-banks? Or government agencies?
Note that such a control experiment is difficult because large banks are subject to constant examination, yet non-banks receive no such reviews. So, the former are analogous to a city with hundreds of police heavily incentivized to write tickets, and the latter to a city where police only respond to accidents; in such a world, one cannot say that citizens of the first city are more irresponsible because they get more tickets. But there are some objective measures of performance that should control for the presence of examiners and focus only on the accidents. Do the consumer finance arms of large banks receive more or fewer complaints on a per-account basis than fintechs? Did they produce proportionately more or less fraud in servicing the PPP program? Are the returns for large bank asset management arms better or worse than standalone firms? Are actual systems outages – as opposed to examiner-identified systems weaknesses — more or less common at bank-affiliated broker-dealers or standalone broker-dealers?
Furthermore, it is also worth pondering how management that has demonstrably managed to produce strong returns, healthy capital levels, strong returns on equity, and high customer satisfaction could nonetheless be unable to manage the governance and controls that are now the predominant focus of bank examination. Is that because their management styles are uniquely unsuited to that particular task? Or perhaps because that task is becoming more difficult, with ever increasing and shifting expectations?
As an Aside, Large Banks Are Not More Complex than Ever
TBTM proponents generally base their emerging concerns on recent changes in the ecosystem of large banks. In a recent speech, the Acting Comptroller of the Currency asserted that banks are “bigger and more complex than ever,” noting that “[t]wenty years ago, the five largest U.S. banks had roughly $3 trillion in combined total assets,” but “[t]oday, the five largest have over $12 trillion. ”  Those statements are worth unpacking a bit.
Much of the growth in large banks’ assets over the past two decades simply reflects inflation and larger holdings of low-risk assets in response to liquidity requirements imposed by U.S. regulators. Inflation alone accounts for $1.7 trillion of the ~$9 trillion increase in assets among the five largest banks over the past 20 years. This growth did nothing to increase the complexity of these institutions. Furthermore, the five largest banks currently hold nearly $4 trillion in reserve balances, Treasury securities, and agency MBS, 10 times higher than in 2002. Holding those assets does not increase the complexity of a bank; to the contrary, those holdings make it less vulnerable to liquidity pressures and therefore safer and easier to manage, which is precisely why the regulators have required it through their liquidity regulations.
There was a single year that did see a substantial increase in the risk assets of the large banks: 2009. In the midst of the Global Financial Crisis, commercial banks purchased failed or failing securities firms, and two large securities firms became bank holding companies. Today, the securities affiliates of the five largest banks hold $2.6 trillion in assets. As noted above, another word for this development is “diversification.”
Over the past 10 years, however, the growth of the five largest banks has stopped and reversed. Adjusted for inflation and high-quality liquid assets, the largest banks are about the same size as they were 10 years ago:
Furthermore, regulators over the past 10 years have used the recovery and resolution plan to reduce the complexity of large banks, and given themselves credit for doing so. Recent academic research also shows that the complexity of banks is decreasing, not increasing.
In short, concerns about TBTM have risen at the same time that banks have grown stronger and less complex.
There’s a Problem with the Solution
If a TBTM bank is to sell off its parts, one might wonder: to whom and how and when? Another large and already diversified institution could be a buyer, but the federal banking agencies are now quite unreceptive to such purchases, where even the most unobjectionable deals are placed on a one-year minimum delay. Do they envision an IPO, and how smoothly and quickly would that go as the investment bankers market a fire sale of a part of a company that is too big to manage? Or do they envision just a simple liquidation, with all the employees fired and client account closed? And since most of the complexity resides in the broker-dealer, is the goal for those entities to become standalone companies, replicating the business model of Lehman Brothers and Bear Stearns?
“Too Big to Manage” is a bad idea. As seen in an accompanying note, it is also not the law.
 See, e.g., Jeremy C. Kress, “Solving Banking’s “Too Big To Manage” Problem”, 104 Minn. L. Rev 171 (2019); Acting Comptroller of the Currency Michael J. Hsu, “Detecting, Preventing, and Addressing Too Big To Manage” (Jan. 17, 2023 speech) [hereinafter, the “Jan. 17, 2023 Speech”].
 See, e.g., Buch, Claudia and Goldberg, Linda, “Complexity and Riskiness of Banking Organizations: Evidence from the International Banking Research Network”, Federal Reserve Bank of New York (May 2021) (“the link between complexity and risks involves trade-offs: diversification benefits and reductions in liquidity risk may weigh against agency problems, monitoring costs, and systemic risk contributions arising from higher complexity”).
 Supervisory stress tests consider the impact of potential changes in revenue and loan losses under stress scenarios based on the diversity of banks’ business models. For example, banks with more diversified business models are more likely to report a significant share of fee income in total stressed revenues. This is quantitatively important because projected noninterest revenues were roughly twice the size of projected loan losses in the most recent stress tests.
 See, e.g., Balla, Eliana, Mazur, Laurel, Prescott, Edward Simpson, and Walter, John; “A comparison of community bank failures and FDIC losses in the 1986-92 and 2007-13 banking crisis,” Journal of Banking & Finance (September 2019) (showing a negative correlation between bank size and the probability of bank failure).
 Of course, there are very few standalone credit card banks. This must surprise TBTM proponents, as a standalone credit card bank would presumably be SETM (small enough to manage).
 See, e.g., Powell, Jerome, Testimony Before the Senate Banking Committee (June 22, 2022) (“Well, I would start by saying that the banking system is very strong, well-capitalized, highly liquid; does a much better job of understanding the risks that it runs and managing them, than before the global financial crisis. And that’s — that’s a reflection of the work that regulators did and that the banks did, too. So that part of the financial system is critically very strong. And we saw that through the pandemic and we see it now.”)
 In 2019 testimony before Congress, BPI questioned how the OCC and Federal Reserve could have over 9,000 outstanding MRAs. Thereafter, the OCC appears to have stopped publishing the number of outstanding MRAs. It does publish the composition of the unknown number of outstanding MRA concerns, and when last reported in fall 2022 in the agency’s Semiannual Risk Perspective, a majority of those MRA concerns – 65% — are related to “Operational” or “Compliance.”
 See, e.g., “Information Technology: IRS Needs to Complete Modernization Plans and Fully Address Cloud Computing Requirements,” GAO Report GA0-23-104719 (February 7, 2023).
 According to a recent ABA/Morning Consult survey, 97 percent of bank customers rate their service as excellent, very good or good.
 Jan. 17, 2023 Speech at 1.
 In 2002, the top 5 banks held approximately $400 billion in reserve balances, U.S. Treasuries, and agency MBS.
 See, e.g., Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation on Financial Regulation: A Post-Crisis Perspective; Brookings Institution (November 14, 2017) (“Living wills have proven enormously helpful to firms and regulators, and they have facilitated significant structural and operational improvements within firms to improve their resolvability.”)
 Correa, Ricardo, Goldberg, Linda, “Bank Complexity, Governance, and Risk,” Journal of Banking & Finance (January 2022) (“BHCs significantly reduced organizational complexity after being required to submit living wills.”)
 See, e.g., Buch, Claudia and Goldberg, Linda, Complexity and Riskiness of Banking Organizations: Evidence from the International Banking Research Network, Federal Reserve Bank of New York (May 2021) (“the link between complexity and risks involves trade-offs: diversification benefits and reductions in liquidity risk may weigh against agency problems, monitoring costs, and systemic risk contributions arising from higher complexity”).