As Chart 9 shows, once an allowance is made for the implicit subsidy, the picture changes dramatically. There is no longer evidence of economies of scale at bank sizes above $ billion. If anything, there is now evidence of diseconomies which rise with bank size, consistent with big banks becoming “too big to manage”. This evidence reconciles Coase’s Theorem with the too-big-to-fail phenomenon. In line with Coase, banks have chosen the size which maximises their private value. But implicit subsidies may have artificially boosted the privately-optimal bank size. Subtracting this subsidy, removing the state crutch, would suggest a dramatically lower socially-optimal banking scale. Like King Kong and Godzilla, these giants would arguably then be physiological impossibilities. What about economies of scope? A recent study by Boyd and Heitz (2011) conducts a simple, but compelling, thought-experiment. They compare the lowest-available estimate of the social cost of the crisis with the highest-available estimate of the private benefit of scale and scope economies in banking. The social costs of too-big-to-fail exceed the private benefits of scale economies by an order of magnitude. Conclusion In his 1928 article, J B S Haldane observed that when “you drop a mouse down a thousandyard mine shaft it walks away, a rat is killed, a man is broken, a horse splashes”. When big banks disappeared down the mineshaft in 2008, their splashes generated a tsunami. To prevent that, their physiology needs to change. Existing change initiatives are right in direction, but may be insufficient in degree.

Prasarn Trairatvorakul: Managing emerging market challenges – Thailand’s and Asian perspectives Remarks by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the reception of the 2011 Emerging Markets Central Bank Governor of the Year Award for Asia, Emerging Markets, Washington DC, 24 September 2011. *  *  *  Distinguished Ministers and Governors, Ladies and Gentlemen, It is my great honor to receive this prestigious award, and I would like to thank the Emerging Markets for your kind recognition. In fact, such recognition is unexpected as I simply fulfill my obligations as central bank governor. To be awarded for doing your job, I guess the job must be quite difficult or challenging. More importantly, I consider this award a recognition of the dedication of the staff of the Bank of Thailand, who have worked hard to ensure Thailand’s sustainable economic and financial stability over the years. As the Bank of Thailand enters its seventieth anniversary next year, our institution is faced with a great challenge to maintain price stability while sustaining growth in the midst of heightened global economic and financial risks. We have no luxury of taking a wait-and-see approach but to continue our best efforts to better manage the external spillovers on our economy and financial system. With continued volatile global capital movements, central banks in emerging markets need to ensure that our financial institutions and markets remain robust; that they can safely and efficiently manage foreign capital inflows as well as outflows, without disrupting the real economy.