WASHINGTON — One question has vexed the Obama administration and Congress since the start of the financial crisis: how to prevent big bank bailouts.
In the last year and a half, the largest financial institutions have only grown bigger, mainly as a result of government-brokered mergers. They now enjoy borrowing at significantly lower rates than their smaller competitors, a result of the bond markets’ implicit assumption that the giant banks are “too big to fail.”
In the sweeping legislation before the Senate, there is no attempt to break up big banks as a means of creating a less risky financial system. Treasury Department and Federal Reserve officials have rejected calls for doing so, saying bank size alone is not the most important threat.
Instead, the bill directs regulators to compel the largest banks to hold more capital as a cushion against losses. It sets up a procedure intended to allow big banks to fail, with the cost borne not by taxpayers but by the biggest financial institutions.
As the debate over the regulatory overhaul heated up this week, a populist minority in both Congress and the Fed requested a revisit to the size issue. They would like to go beyond a provision in the bill, suggested by Paul A. Volcker, the former Fed chairman, and supported by President Obama, that would seek to keep banks from growing any larger but not force any to shrink.
“By splitting up these megabanks, we by definition will make them smaller, safer and more manageable,” Senator Edward E. Kaufman Jr., Democrat of Delaware, said in a speech Tuesday.
The president of the Federal Reserve Bank of Dallas, Richard W. Fisher, broke ranks with most of his colleagues within the central bank last week, declaring, “The disagreeable but sound thing to do regarding institutions that are too big to fail is to dismantle them over time into institutions that can be prudently managed and regulated across borders.”
There also has been concern about the size of banks from Republicans who believe in free-market principles. Several senators from the South and West — Richard C. Shelby of Alabama, Johnny Isakson of Georgia, John Cornyn of Texas and John McCain of Arizona — have expressed a desire to revisit the 1999 repeal of the Glass-Steagall Act, the Depression-era law that separated commercial and investment banking.
Alan Greenspan, the former Fed chairman, has entertained the idea of splitting up the banks but has stopped short of advocating it.
“If they’re too big to fail, they’re too big,” he said in an October speech.
He added: “In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole. Maybe that’s what we need.”
In January, the White House embraced a proposal by Mr. Volcker that would ban banks that take customer deposits from running their own proprietary trading operations, or making market bets with their own money. It would also limit the share of all financial liabilities that any one institution can hold — besides deposits — but it would be up to regulators to set the limit.
A federal law enacted in 1994 already addresses size by restricting any bank from holding more than 10 percent of the nation’s deposits, although several of the largest banks have been granted waivers from that requirement or used loopholes to evade its intent.
The Volcker proposal resembled an amendment by Representative Paul E. Kanjorski, Democrat of Pennsylvania, that would let regulators dismantle financial companies so large, interconnected or risky that their failure would jeopardize the entire system. The amendment was part of a regulatory overhaul that the House adopted in December, largely along party lines, and is also in the Senate version in a modified form.
At a hearing on Tuesday about the bankruptcy of Lehman Brothers, which caused credit markets to seize up in September 2008, the Fed chairman, Ben S. Bernanke, reiterated that his preference was to limit the risky behavior of banks rather than break them up.
“Through capital, through restrictions in activities, through liquidity requirements, through executive compensation, through a whole variety of mechanisms, it’s important that we limit excessive risk-taking, particularly when the losses are effectively borne by the taxpayer,” Mr. Bernanke said.
