Concerning system risk, connections, practices matter almost as much as size

Filed under: Citigroup Inc. (C), Bank of America (BAC), Federal Reserve, Financial Crisis

Upcoming financial service reforms led by U.S. Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, are likely to address, among other concerns, one longstanding flaw in the U.S. financial system -- the 'too big to fail' condition.

Further, while it is appropriate to empower federal monetary officials, such as the U.S. Federal Reserve, and other federal regulators, to set limits on firms -- Citigroup, Inc. (C) or the Bank of America Corporation (BAC), for example -- which are so big or whose situation is so uncertain/unstable that their collapse would jeopardize the U.S. financial system, lawmakers should also write into the legislation the power to modify the business model of other firms: namely, those 'too interconnected to fail.'

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