In the discussion of whether America’s largest financialinstitutions have become too big, a sea changein opinion is underway. Two years ago, during the debate about the Dodd-Frankfinancial-reform legislation, few people thought that global megabanks represented a pressing problem. Someprominent senators even suggested that very large European banks representedsomething of a role model for the United States.

In any case, the government, according to the largest banks’ CEOs, couldnot possibly impose a cap on their assets’ size, because to do so wouldundermine the productivity and competitiveness of the US economy.Such arguments are still heard – but, increasingly, only from those employed byglobal megabanks, including their lawyers, consultants, and docile economists.

Everyone else has shifted to the view that these financial behemoths have become too large and too complex tomanage – with massive adverse consequences for the wider economy. And everytime the CEO of such a bank is forced to resign, the evidence mounts that theseorganizations have become impossible to manage in a responsible way thatgenerates sustainable value for shareholders and keeps taxpayers out of harm’sway.

Wilbur Ross, a legendary investor with great experience in the financialservices sector, nicely articulated the informed private-sector view on thisissue. Herecently told CNBC,

“I think it was a fundamental errorfor banks to get as sophisticated as they have, and I think that the biggerproblem than just size is the question of complexity. I think maybe banks havegotten too complex to manage as opposed to just too big to manage.”

In the wake of Vikram Pandit’s resignation as CEO of Citigroup, JohnGapper pointedout in the Financial Times that “Citi’s shares trade at less than athird of the multiple to book value of WellsFargo,” because the latter is a “steady, predictable bank,” whereas Citigrouphas become too complex. Gapper also quotes Mike Mayo, a leading analyst of thebanking sector: “Citi is too big to fail, too big to regulate, too big tomanage, and it has operated as if it’s too big to care.”Even Sandy Weill, whobuilt Citi into a megabank, has turned againsthis own creation.

At the same time, top regulators have begun to articulate – with someprecision – what needs to be done. Our biggest banks must become simpler. TomHoenig, a former president of the Federal Reserve Bank of Kansas City and now a top official at theFederal Deposit Insurance Corporation, advocates separating big banks’ commercial and securities-tradingactivities. The cultures never mesh well,and big securities businesses are notoriouslydifficult to manage.

Hoenig and Richard Fisher, the president of the Federal Reserve Bank of Dallas, have been leadingthe charge on this issue within the FederalReserve System. Both of them emphasize that “toocomplex to manage” is almost synonymouswith “too big to manage,” at least within the US banking system today.

George Will, a widely read conservative columnist,recentlyendorsed Fisher’s view . Big banks get a big taxpayer subsidy – in the form of downsideprotection for their creditors. This confers on them a funding advantage andcompletely distorts markets. These subsidies are dangerous; they encourageexcessive risk-taking and very high leverage – meaning a lot of debt relativeto equity for each bank and far too much debt relative to the economy as awhole.

Now these themes have been picked up by Dan Tarullo, an influential memberof the Board of Governors of the Federal Reserve System. In animportant recent speech, Tarullo called for acap on the size of America’slargest banks, to limit their non-deposit liabilities as a percentage of GDP –an entirely sensible approach, and one that fits with legislation that has beenproposed by two congressmen, Senator Sherrod Brown and Representative BradMiller.

Tarullo rightly does not regard limiting bank size as a panacea – his speech made it clear that there aremany potential risks to any financial system. But, in the often-nuanced language of central bankers,Tarullo conveyed a clear message: the cultof size has failed.

More broadly, we have lost sight of what banking is supposed to do. Banksplay an essential role in all modern economies, but that role is not to assumea huge amount of risk, with the downside lossescovered by society.

Ross got it right again this week, when he said:

“I think that the real purpose andthe real need that we have in this country for banks is to make loansparticularly to small business and to individuals. I think that’s the hard partto fill.”

He continued,

“Our capital markets aresufficiently sophisticated and sufficiently deep that most large corporationshave plenty of alternative ways to find capital. Smaller companies and privateindividuals don’t have really the option of public markets. They’re the onesthat most severely need the banks. I think they’ve kind of lost track of thatpurpose.”

Hoenig and Fisher have the right vision. Tarullo is heading down the rightpath. Ross and many others in the private sector fully understand what needs tobe done. Those who oppose their proposed reforms are most likely insiders –people who have received payments from big banks over the past year or two.