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Cost of being Too Big to Fail: Now just $28 million

April 16, 2013: 5:00 AM ET

A small Fed tax will do little to rein in big banks.

Barney Frank

Barney Frank's idea of imposing a large fee on big banks to encourage them to shrink has largely been scrapped.

FORTUNE -- For the big banks, the Federal Reserve's stick remains pretty rubbery.

When Dodd-Frank, the banking reform law passed in the wake of the financial crisis, was originally envisioned, co-author Congressman Barney Frank, members of the Obama administration, and others believed the new rules would encourage banks to shrink by making it too expensive to remain big. That, they believed, was the best way to solve our financial system's Too Big to Fail problems.

On Monday, the Fed finally announced its plans to implement a tax on the nation's largest banks and other financial firms that are deemed "systemically important." What's the cost of being Too Big to Fail? A mere $28 million.

That's roughly how much Citigroup (C), the smallest of the nation's four largest banks, would have to pay each year under the Fed's proposed rules. To put that in perspective, Citigroup also announced its first-quarter earnings on Monday. The bank netted $4 billion. The Fed's new fee is just 0.7% of those earnings, and that's just what the bank earned in the first three months of the year.

MORE: Wells Fargo beats expectations, even as its mortgage business shrinks

JPMorgan Chase (JPM), the biggest of the nation's banks, will have to pay more like $44 million annually under the Fed's proposed formula. But that also amounts to just 0.7% of the $6.5 billion that the bank earned in the first three months of the year.

It's also very small compared to what the banks might have had to pay under Dodd-Frank. When it was first drafted, Dodd-Frank included some $400 million in annual fees for the biggest banks. One of the fees was meant to establish a $50 billion fund in order to pay for future bailouts. That was supposed to be built up over 10 years. The bill also included a fee to repay the government for what it had spent to bail out the banks during the financial crisis. Last week, the Obama administration estimated the costs of the TARP bailout fund at $47.5 billion, though that also includes what the government spent to save the automakers.

What's more, at least one of the fees was going to be assessed based on each bank's own borrowing. That was meant to curtail the use of short-term funding, another way the Too Big to Fail banks added to the financial crisis.

Both those fees were eventually scrapped. In the end, when the bill passed, what we got was this much smaller fee that the Fed plans to impose for the extra cost of regulation, which only now nearly three years after Dodd-Frank passed is the Fed going to begin to charge. The Fed estimates that this will amount to about $440 million a year paid by about 70 banks and other financial firms, of which the biggest will pay a larger portion. There's a debate about how much big banks benefit from the implicit backing of the government. Some say $83 billion. Some say less. Whatever it is, it's probably more than $440 million a year.

MORE: How banks could get blown away by the bond bubble

Since the passage of Dodd-Frank in mid-2010, JPMorgan and Wells Fargo (WFC) have grown by a collective $460 billion in terms of assets. Citi and Bank of America (BAC) have shrunk, but only by one-sixth as much as their rivals have grown. And it's not clear that's the work of Dodd-Frank, or just the result of those two banks pulling themselves out of the muck. At the same time, a number of other banks have passed from being regional lenders to potential problems for the economy if they were to fail.

There has recently been a new push for rules that would require big banks to hold even more capital. Those efforts have once again produced dire predictions from Wall Street. What's clear is that, at least so far, in the battle to stop banks from growing too big, we have clearly failed.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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