The too-bigto-fail problem could be mitigated if smaller, dynamic firms seized market share from less nimble incumbents. This is no pipe dream in 2010. Many old relationships between firms and clients were uprooted during the crisis. Customers – institutional and retail – are seeking new ways of doing business and new firms with which to transact.
The financial services industry is ripe for a healthy dose of creative destruction. But, this won’t happen if policy divides firms that are too-big-to-fail from those that are not. It won’t happen if select incumbents have permanent funding advantages. And, it won’t happen if policy preferences deter would-be competitors from taking on the big guys.