Most important bank failures spring from correlated risks, like the bursting of a real estate bubble, that affect many banks at roughly the same time. Bailing out a large number of smaller failing banks may be easier than bailing out a smaller number of large ones, since it is easier to apply bankruptcy and the procedures of the Federal Deposit Insurance Corporation to the smaller institutions. But that outcome hardly gets rid of bailouts.

THERE is still another problem. The more a bank is legally limited in terms of easily measurable size, the more it may resort to off-balance-sheet activities to make up the difference. “Breaking up big banks” may really mean making these less-transparent bank activities much more important to a bank’s fate.

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Maybe tough new rules for off-balance-sheet activities could limit this problem, but the overall history of financial regulation belies that view. Banks are usually wealthier, nimbler and smarter than their regulators, at least when it comes to finding loopholes in the regulations or making their moves more opaque. In any case, splitting up major banks also requires that regulators get some other significant decisions right.

There is a better alternative: expanding the liability for major financial institutions. If a shareholder invests a dollar in a big bank, why not make that shareholder liable for the first $1.50 — or more — of losses as insolvency approaches? In essence, we would be making the shareholders liable for the costs that bank failures impose on society, and making the banks sort out the right mixes of activities and risks. Eugene N. White, an economics professor at Rutgers University, supported a related proposal in a recent paper, “Rethinking the Regulation of Banking: Choices or Incentives?”

This proposal would shrink the financial sector, while avoiding excess regulatory micromanagement of bank activities. But it could still be combined with other regulations, like limits on leverage, if deemed appropriate or necessary.

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Unlike the “big is bad” view, this proposal would penalize failing banks rather than safe, successful ones that happen to be large. That’s also more in accord with the American ethos of winning at business.

Under this reform, it’s quite possible that we would end up with some very large and also relatively safe banks. Note that Canada, whose banking system has proved remarkably safe over the last century, relies on a small number of major banks.

In any case, the market can adjust bank sizes over time, as perceived risks to banks change, without requiring new legislation to ward off each new source of risk. It’s hard for the law to win that race, especially when Congress is so fractious.

Expanded liability for bank shareholders might satisfy the Occupy Wall Street movement, and could be sold as a market-oriented, not regulatory solution; it’s probably what markets would insist upon if there were no central bank and no F.D.I.C. As recently as the 1980s, the partnership structure, another alternative to limited liability, was common among investment banks — and that hardly seemed a crippling drawback at the time.

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We need to resist vengeful or “feel good” options for financial reform and embrace those that will really work.