Which Should Be Bigger: Banks, or the Economy?

All the gyrations going on over at Citigroup (NYSE: C  ) has everybody thinking about the size of the biggest banks, once again. While the clamor to "break up the banks," has died down since it was given full throat last summer, the news that the chair of Citi's board of directors no longer believes that a breakup is plausible for the bank has brought the issue to the fore once again.

But, wait. Another tidbit from Bloomberg paints a picture of Citi, JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) being much bigger than they are now, if new accounting rules being floated by the vice chair of the Federal Deposit Insurance Corp. go into effect.

TBTF, redux
According to a recent article by the The Wall Street Journal, Michael E. O'Neill was once of the opinion that Citi should be whittled down to a manageable size. Such a strong believer in that concept was he that he suggested the same course of action for Bank of America when he was being considered for the job of outgoing CEO Kenneth Lewis.

This man is a conservative banker on par with none, as evidenced by his time at the helm of the safe, sound, and profitable Bank of Hawaii (NYSE: BOH  ) . O'Neill nipped and tucked at the bloated bank -- many times smaller than Citi -- and turned it around in just four years. He is obviously not afraid to make changes; just ask Vikram Pandit.

So, for O'Neill to now say that seriously chopping away at Citi is an idea that has come and gone, well, that really means something.

But then, he may have missed the Bloomberg article.

Gargantuan banks that would dwarf the U.S. economy?
Apparently, Thomas Hoenig, the FDIC vice chair in question, feels that U.S. banks should be using accounting methods�more often seen in Europe. The rules would effectively move off-balance sheet items like derivatives and mortgage-backed securities right back onto the books, making the country's biggest banks absolutely gigantic. The article mentions that Citi would grow by 60%, while JPMorgan, B of A, and Wells would double in size.

According to Bloomberg's estimates, the assets of these four banks would be about 93% of the country's GDP for last year. The article notes that these very items, moved off to the side, caused much of the mayhem associated with the financial meltdown. Of course, it was likely more their dodgy qualities that made them so dangerous, rather than their off-sheet location.

At any rate, we needn't fear the advent of bigger-than-life banks. It seems that ideas like this have been floated before, only to be withdrawn�under intense lobbying pressure by banks. As much fun as the subject of adjusting the size of TBTF banks is to bandy about, it seems like that is as far as it will ever go.�

Citigroup's stock looks tantalizingly cheap. Yet the bank's balance sheet is still in need of more repair, and there's a considerable amount of uncertainty after a shocking management shakeup. Should investors be treading carefully, or jumping on an opportunity to buy? To help figure out whether Citigroup deserves a spot on your watchlist, I invite you to read our premium research report on the bank today.�We'll fill you in on both reasons to buy and reasons to sell Citigroup, and what areas that Citigroup�investors need to watch going forward.�Click here now�for instant access to our best expert's take on Citigroup.