It's not clear to me how "bigness" matters. The article makes clear that small banks were exposed to disciplining market forces, but for large banks such forces were obviated by government protection. Worrying about size seems to miss the point.
"Bigness" matters because only a few of the large banks are primary dealers [1] - they directly play a role in US treasury auctions. All the other investment banks that aren't primary dealers only play a part in the secondary market. Part of this relationship is also the agreement that large banks are always making markets [2] and providing liquidity for highly-traded Fixed Income products - without someone to make the markets, no one would be able to trade. A large part of the global finance system is based on the ability to easily buy or sell these products, from the huge institutional clients like Fidelity, to the individual investor using their Schwab account (albeit even that is done through a much larger entity to access the market). The move towards computerization in the financial industry over the past 30 years has directly impacted the bottom line of these large banks (via smaller bid/ask spreads [3]), but has also directly lead to increased liquidity due to trading volume.
"Obviated by government protection" BECAUSE of their size. Thus the slogan "too BIG to fail".
When big banks make money by taking crazy risks, they earned every penny and how DARE we try to tax or regulate them. When they lose money by taking risks, we need to bail them out for the good of the free world and how DARE we ask to be paid back. Small banks do not have this attitude.
How much collateral damage will there be if they fail? This is the reason the banks got bailed out, they are big and complicated so can't be unpicked and wound up.
If they were smaller the collateral damage is smaller and wind up manageable. There are real reasons for not letting big banks fail so we need to avoid them getting that big and complicated so they can be allowed to fail.
