From "too big to fail" - to "too big, will fail"

The recent banking crisis has brought to the fore the argument against letting banks become too big. For far too long, regulators and politicians (including the erstwhile finance minister - Chidambaram) have argued for the merger of government owned banks. For some strange reason (atleast strange to me) - this is supposed to increase the ability of the banks to compete. With capital adequacy requirements unchanged, why a merger will allow greater competitiveness - especially since in the Indian context the merged banks will typically not be allowed to restructure either branches or staff - has always mystified me. At last, I see a serious academic Prof. Jayanth Varma argue for smaller banks. Hope someone is listening.