You see this as a "failure of regulation"? I see it as a failure of deregulation. We passed laws and made interpretations which reduced the effect of structural safeguards in the financial system. We didn't pass laws which strengthened those safeguards or improved oversight.
> For years the Federal Reserve was concerned about the ever-growing size of our largest financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest size (Berger and Humphrey 1994, p. 7; see also Berger 1994). A decade ago, citing such evidence, I noted that "megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail" (Greenspan 1999). Regrettably, we did little to address the problem.
> ... However, should contingent capital bonds prove insufficient, we should allow large institutions to fail and, if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility, whereupon the regulator would be granted access to taxpayer funds for "debtor-in-possession financing" of the failed institution. Its creditors (when equity is wholly wiped out) would be subject to statutorily defined principles of discounts from par ("haircuts"), and the institution would then be required to split up into separate units, none of which should be of a size that is too big to fail. The whole process would be administered by a panel of judges expert in finance.
This is based on issuing contingent capital bonds, which funds a "living will" "in which financial intermediaries are required to offer their own plans to wind themselves down in the event they fail."
As for "manageable chunks", vs. "artificial" chunks, I point you to this comment by Alan Greenspan, in http://www.freepatentsonline.com/article/Brookings-Papers-Ec..., that the current size is too large, and not manageable.
> For years the Federal Reserve was concerned about the ever-growing size of our largest financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest size (Berger and Humphrey 1994, p. 7; see also Berger 1994). A decade ago, citing such evidence, I noted that "megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail" (Greenspan 1999). Regrettably, we did little to address the problem.
> ... However, should contingent capital bonds prove insufficient, we should allow large institutions to fail and, if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility, whereupon the regulator would be granted access to taxpayer funds for "debtor-in-possession financing" of the failed institution. Its creditors (when equity is wholly wiped out) would be subject to statutorily defined principles of discounts from par ("haircuts"), and the institution would then be required to split up into separate units, none of which should be of a size that is too big to fail. The whole process would be administered by a panel of judges expert in finance.
This is based on issuing contingent capital bonds, which funds a "living will" "in which financial intermediaries are required to offer their own plans to wind themselves down in the event they fail."