The reason Lehman Brothers was allowed to fail was to avoid moral hazard and show that no bank is too big to fail. But the policy failed since the mess after Lehman collapse means a repeat is unlikely: if a big bank runs into trouble, it is now clear it will be saved to avoid a repeat of the Great Recession.
So what to do? Make the big banks safer by raising their capital requirements .
Right now bank reserves should exceed 7% of assets. An international organization, the Financial Stability Board, designated some banks as Globally Systematically Important Banks (G-SIB). The list of the banks is here (on page 3). Reserves of these banks should be higher, up to 9.5% of assets (note that banks sometimes hold excess reserves: JP Morgan's reserves are 9.8% of assets). The U.S. regulators consider an even higher requirement. Regulators require the extra reserves to reduce risk of a large bank failing.
There are two offsetting effects operating on large banks. They must hold more capital, reducing return on equity. On the other hand, since they are unlikely to fail, they can borrow money at lower rates. The net result is debatable but, I think, overall, it is good to be a big bank.
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