New Rules Let Big Banks Compete Abroad

Updates to add quote.

NEW YORK (TheStreet) -- Big banks in Europe and Asia that compete with those considered "too big to fail" in the States may actually be helping U.S. banks maintain a competitive edge.

The House Financial Services Committee and Treasury Department have come up with a plan to unwind large banks in a more orderly fashion and monitor their operations more closely. The most controversial segment of the legislation announced on Tuesday is the one that forces shareholders, debt holders and competitors -- rather than taxpayers -- to suffer the cost of a large bank's failure.

One might ask why the government isn't simply making big banks get small, a la the Glass-Steagall Act that followed the Great Depression, which built a wall between investment and commercial banking. The answer is simple: Counterparts overseas aren't doing the same.

"Like it or not, we're going to have some financial services entities that are going to be T.B.T.F.," says Walt Mix, a managing director at the consultancy LECG, using an increasingly common acronym for "too big to fail." "There's an inexorable economic pressure that operates on a global basis. You have huge European banks, Japanese banks -- look at Deutsche Bank(DB Quote)!"

Mix, a former commissioner of the California Department of Financial Institutions, worked on the regulatory side during the fallout of the savings and loan crisis nearly two decades ago, and is now advising on deals regarding troubled West Coast banks. He notes that out of the top 20 global banks, only a few are based in the United States.