Reply #42: A medium sized bank is less likely to take excessive risk because ...

[GOTV]

... it's too small to count on a bailout. The best it could hope for is that the 29 other banks start to go belly up in the same quarter to get some tax payer financed assistance. Unlikely.

Goldman Sacks on the other hand was bailed out because it was TBTF. In another year it will be bigger and thus it knows it will not be allowed to fail. Now while it may not be able to engage in some of the risky behaviors of the past there's nothing to stop it from creating new risky behaviors. In fact for them, since they are TBTF, there is no such thing as risky behavior. There is only actions which bring small profits and actions which bring big profits.

If you're not TBTF you don't need to be told not to take excessive risk. Your own impending failure coerces you to trim the risk.