If you do that you're still subsidizing banks. The simple act of telling creditors that if the banks gets into trouble the government will step in, wipe out shareholders and keep depositors and creditors whole, makes credit more available to them. Of course I'd rather lend to a bank with that kind of backstop than a small savings bank/credit union.
And then if I'm a bank manager, I'm going to borrow as much as possible, and do a lot of high-risk, high return type trading, if it works out I make a ton of money, if I lose it's the government's problem.
Finally, it's not that likely for a Treasury official to tell a TBTF bank they're taking it over - it's an administrative nightmare, and the banks have captured the regulators.
So if a bank gets weak, markets will keep extending credit as long as there's a government backstop, and it won't get taken over, and management will keep playing double or nothing with taxpayers' money.
And then if I'm a bank manager, I'm going to borrow as much as possible, and do a lot of high-risk, high return type trading, if it works out I make a ton of money, if I lose it's the government's problem.
Finally, it's not that likely for a Treasury official to tell a TBTF bank they're taking it over - it's an administrative nightmare, and the banks have captured the regulators.
So if a bank gets weak, markets will keep extending credit as long as there's a government backstop, and it won't get taken over, and management will keep playing double or nothing with taxpayers' money.