How You Cut a Bank Down to Size

Last Updated Jan 22, 2010 12:08 PM EST

President Obama left out a critical element yesterday in announcing his plan to limit the size of banks -- how you do it. A number of ideas are kicking around, but following are the most likely methods.

Asset Cap. This would parallel the national deposit cap, which prohibits banks from controlling more than 10 percent of domestic insured deposits. But under this approach the cap would limit a financial company's total assets, which include loans, reserves, investment securities and real estate, to a set percentage of the banking industry's total assets.

The U.S. banking sector has roughly $13 trillion in assets. That means a 10 percent cap would limit banks to no more than $1.3 trillion in size. That would affect Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM). A five percent cap would also reel in Goldman Sachs (GS), Morgan Stanley (MS) and Wells Fargo (WFC).

Liability Cap. A bank's liabilities mostly comprises its checking, savings, CD and other core deposits. Under this method, a financial firm's maximum total liabilities would be set as a percentage of U.S. GDP, which is roughly $14 trillion. So if the cap were fixed at 10 percent, a banking company's liabilities couldn't exceed $1.4 trillion. That would affect Bank of America, Citigroup and JPMorgan.

Discretionary Cap. No given limit on bank size would be set. Instead, bank regulators could force any financial firm determined to pose systemic risk to sell assets or business units, in theory without hurting the company's competitiveness.

The below charts from investment research firm Concept Capital model which banking companies would be affected by a 10 percent cap on assets and liabilities.

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    Alain Sherter covers business and economic affairs for CBSNews.com.