A major objection to “too big to fail” corporations is that the taxpayers need to bail them out. The Third National Bank of Topeka can be forced into bankruptcy with little risk of escalation; not so with JPMorgan Chase & Co. or American International Group. This allows those companies to make bets of the form “Heads we win; Tails the taxpayer loses.”
There is already a big problem that corporate executives are more interested in their next quarterly bonus than in long-term company profits. On top of that, stockholders and bondholders are happy to assume irresponsible risk if the government will step forth to assume losses. The 2008 financial meltdown cost trillions of dollars altogether, but the Wall St. speculaters who brought ruin on us all are still driving their Maseratis and Lamborghinis.
At the height of the crisis, almost all the major investment banks were insolvent; regulators should have insisted that they raise more capital but the regulators were completely dominated by Wall Street figures who didn’t want stock wealth diluted. This was an utter travesty. Hundreds of billions in taxpayer dollars were lost, along with the opportunity to teach “moral hazard” to the Wall St. gamblers.
Raising the reserve requirement for customer deposits would have little effect. The crisis wasn’t caused directly by commercial loans, but by shenanigans like rating-agency corruption and speculation in derivatives with no legitimate hedging purpose.
Note that financial derivatives in play have a nominal value measured in quadrillions of dollars – yes that’s Quadrillion with a Q. It was huge bets on derivatives that brought down AIG(*) and the problem is getting worse after the crisis with the gamblers learning there is no hazard lesson to be learned. IIUC, Dodd-Frank legislation was deliberately stripped of regulations on derivatives trading.
(* - Many of these bets were not “Heads the AIG stockholders win, tails taxpayer loses” but rather “Heads the AIG salesmen win with billion-dollar bonuses!” It turns out the upper management of the world’s largest insurance company were unaware of of the most basic principle of insurance: fair-weather profits should be held in reserve for a rainy day.)
It is common for a small group of companies – even without explicit cooperation – to operate as a cartel, maximizing total cartel profit. With many well-funded companies, true competition is more likely.