President Obama announced a sweeping new plan today to curb the size of banks in what he called an effort to get rid of the possibility of a bank being “t00 big to fail.” Basically the idea behind it is to limit the amount of risk a bank can take on, and leave open the possibility of government authority blocking actions they deem as too risky.

Probably those most affected by this are big investment banks like Goldman Sachs. These kind of banks will likely now have to consider letting go of their traditional commercial banking area in order to be able to keep doing things such as proprietary trading of mortgage securities. The White House believes that separating the risk takers from the general commercial banks would be a good move for the entire financial system.

This bank limit that Barack Obama announced today is part of a broader system of bank reform plan that is in the works right now. The recent announcement of a bank tax on the TARP money that is being paid back was met with skepticism and from many and the same thing is happening in this case as well.

Today the stock market is plunging, in large part because of the bank limit rules that were announced today. Investors worry that consolidation of financials will no longer be possible because of the cap that has been put on their activity and their deposit levels.

I believe that the President is seeking to avoid a financial collapse as there was last year, but I do also believe he needs to be careful about getting government too involved in the institutions. Obviously there needed to be more rules than there were a year ago, so hopefully these will help. There is a very fine line that must be walked. The government must set rules that prevent future collapses while still encouraging growth among these companies. Only time will tell how this proposal will work for the industry.