Break them up then. Not directly, but indirectly by changing the incentives to be big. Also define a "bank" semi-recursively so even a company which merely owns 20 banks (or a company which owns a company which owns a bank, etc) is still considered a bank for the purposes of these laws.
Banks with holdings of over 0.5% of GDP lose all FDIC protection, while still paying.
Banks with holdings over 1% pay quadruple FDIC premiums while still receiving no coverage.
Banks over 2% also pay double-tax on every tax they pay either directly or indirectly, so all the payroll taxes are doubled and so are corporate profit taxes.
Banks over 3% pay all above but instead of double taxes, quadruple taxes.
Banks over 5% pay everything and get taxed at 5% of assets per year.
Very smart folks would immediately start figuring out how to fairly cleanly break the banks up while simultaneously not destroying themselves or the entire economy. Why? Because there'd BE MONEY IN IT.
I'm sure you would've said the same about Standard Oil or Bell back in the day.
Breaking up large corporation can and has been done before. It could be done again if government was interested in doing it, but unfortunately a combination of captured regulators and a revolving door between government and business more or less ensures that won't happen.
The regulations are what created large banks in the first place. It's virtually impossible to start a bank today because of the web of regulations; thus new banks don't get started and the big banks don't get competition.
a) minimize a current financial crisis
b) avoid future financial crises
c) penalize the law breakers responsible
The feds have done fairly well on a), avoiding a complete collapse
of depositor confidence, but the politicians and rabble-rousers seem
to be focused on c), arguing about exposure and punishment instead
of figuring out how to prevent another collapse.
Structuring a system that is more resistant to fraud and other behaviour
that puts the national economy at risk would help. Either effective
oversight or more exposure to market forces might help. Merely punishing
individual or corporate wrong-doers will not prevent another collapse.
A firm, banking, investment, or trading, that is considered "too big
to fail" is also not sufficiently exposed to market forces for the
market in its shares to reflect the actual risks to the firm.
In other words, the taxpayers are covering a TBTF bank's risks.
We would benefit far more from finding a way to move banking away
from consolidation than we would from jailing or fining the guilty.
The country should be able to suffer the complete failure of any
single bank or firm without much more than a small hiccup in our
economy. FDIC rates should reflect risk for depositors
per-institution, and be public, the way bond ratings are.
Stock-holders and bank creditors would be on their own.
A nation whose banking industry is dominated by 10 banks cannot be
secure, with around 100 banks of size is at risk, and with 1,000
banks may be able to cope with a few percent of them failing every year.
Finding a market solution to counterbalance the ongoing wave of
consolidation would help.
Unfortunately the public doesn't get excited about passing complicated financial regulations.