American bank regulators are warning the four big banks – JP Morgan, Bank of America, Citigroup and Wells Fargo – that they risk being broken up because of their continued wrongdoing and blunders. The president of the New York Federal Reserve Bank, William Dudley, cited such post-crisis misdeeds as the big banks’ rigging of both the London Interbank Offered Rate and the foreign exchange markets as well as JP Morgan’s loss of $6 billion in its “London Whale” trading scandal. Mr. Dudley warned “If that [continued bad behavior] were to occur, the inevitable conclusion will be reached that your firms are too big and complex to manage effectively. In that case, financial stability concerns would dictate that your firms need to be dramatically downsized…”

So, on top of too-big-to-fail, we have too-big-to-behave and too-big-to-manage.

Which raises a more fundamental question: Are there any genuine advantages of enormous size in banking that might justify enduring all the risks and headaches entailed? Does the economy or the public enjoy any benefits from such gigantism?

The leading benefit claimed by the big banks is greater efficiency and economies of scale. In a 2012 column entitled “In Defense of Big Banks,” a former chief executive of JP Morgan, William Harrison, wrote: “The consolidation that took place was driven by the market’s needs and represented an evolution toward greater efficiency in banking, just as companies like Amazon, Starbucks and Home Depot brought efficiency to retail.”

What “market needs” and benefiting whom and in exactly what ways, Mr. Harrison didn’t say.

In banking, the most straightforward and widely accepted measure of efficiency is overhead expense, namely all the expenses other than interest expense and financial losses. So compare the four largest American bank holding companies, with their roughly $8 trillion in assets, to the next 86 largest banks, each with more than $10 billion and collectively about $6.7 trillion in assets. This discloses a modest scale advantage. Based upon 2013 regulatory data, the overhead of the big four was 3.04% of average assets, about a quarter percentage point lower than 3.28% for the comparison group.

Who benefits? It would be hard to find many small businesses or consumers who would say that the biggest banks have used their scale to make loans more readily available. Indeed, the LIBOR scandal demonstrates that the big banks have ridden rough-shod over borrowers.

A look inside these banks suggests the real beneficiaries: Insiders taking home big paychecks. The big four American banks’ personnel expense – itself a component of overhead – runs higher, clocking in at 1.52% of average assets versus 1.43% for the comparison group of 86 smaller banks. So, the four banking giants’ scale advantage would be even greater, by a third of a percentage point or about $25 billion annually, if these big bankers didn’t use so much of it to line their own pockets.

Actually, only the pockets of those engaged in the highest-risk activities. Take JP Morgan, the largest American bank. The personnel expense of its two FDIC-insured commercial banking subsidiaries, which employ about 85% of employees and hold 85% of consolidated assets, was 1.23% of average commercial banking assets in 2013. Personnel expense of its investment banking subsidiary — J.P. Morgan Securities, LLC — and holding company was 1.88% of their combined average assets.

So, JP Morgan’s traditional commercial bankers generate the scale economies, while its high-flying traders and the financial engineers of those infamous subprime CDOs enjoy the benefits. In staffing and dollar terms, its 33,000 investment banking and holding company employees earn an average of $181,000, far more than the $121,000 average for its 200,000 commercial bank employees.

Not only are the scale benefits enjoyed internally, but they encourage the riskiest activities. Hence the idea of re-imposing the separation of commercial and investment banking that prevailed under the Glass Steagall Act. This is not to begrudge successful traders and investment bankers robust compensation, but their high risk/reward activities were never meant to enjoy the federal guarantee extended by Glass Steagall – insurance for deposits supporting only low-risk commercial banking activities.

Any genuine scale analysis must consider the other side of the coin, i.e. potential dis-economies of scale. Well, our too-big-to-fail banks suffer one glaring dis-economy: they must carry extra capital. In June, regulators finalized a rule requiring them (those with more than $700 billion in assets) to carry an extra equity capital cushion (5% vs. 3% for smaller banks).

This is an eminently prudent safeguard. However, extra capital requirements are costly to the public and to the economy, since greater capital requirements constrain lending. Quite simply, the extra dollar held as supplemental capital is a dollar that can’t support loans. While this has been a moot point over the last several years of abnormally slack loan demand, loan demand won’t always be so anemic.

In other words, don’t be surprised if fewer loans become available from our banking behemoths when small business and consumers do start seeking loans. Lower capital requirements will enable smaller banks more readily to meet the increased loan demand; however, they will have less collective impact since they hold only about one-third of overall banking industry assets.

It turns out that the leading justification asserted in defense of gigantism in banking is an empty claim. Writing and implementing special rules to regulate too-big-to-fail giants starts to look like a fool’s errand. Better just to break them up, as many critics have long advocated and bank regulators are now threatening. How many variations of too-big must we endure before we embrace the reality that our big banks are simply too big?

Mr. Jahncke writes frequently on the political economy.