The landscape of the banking industry has changed dramatically over the last 30 years. Prior to the 1980s, it was dominated by lenders that were strictly limited by federal and state laws against interstate banking. As the deregulatory fervor of the Reagan era took hold, however, these restrictions were systematically eliminated, igniting the creation of regional banks. The largest of these then began joining forces in the 1990s to create the first truly national banks. After further restrictions were removed in 1999, they began supplementing their traditional banking activities with the trappings of investment banks.
The justification all along has been twofold: First, paid industry lobbyists convinced legislators on both the state and federal level that regulations were unnecessary because bank executives would never behave in a way that would put the now-gargantuan institutions or the economy at risk. It should go without saying that this justification is no longer viable. And second, that greater size offered greater economies of scale, and thus cheaper products for consumers and presumably better returns for investors. It's the purpose of the following chart to dispel this notion:
As you can see, from an investment perspective, the nation's four largest banks by assets -- JPMorgan Chase, Bank of America (BAC -1.71%), Citigroup (C -0.06%), and Wells Fargo (WFC -0.79%) -- have been far from the best performers over the past dozen years. Even the top performer, Wells Fargo, is still far outdone by smaller rivals like People's United Financial (PBCT) and East West Bancorp (EWBC 0.79%). In fact, had you invested your hard-earned money in either Bank of America or Citigroup at the beginning of the year 2000, you'd have 22% and 85% less today, respectively -- and that's excluding the impact of inflation.
Has too big to fail failed? Yes. I don't think there's any way to get around that. But does that mean it's going away? Probably not.