This is a crisis-time benefit of separation. Second, separation can secure an improved pre-crisis allocation of financial resources from a societal perspective. High private return investment banking activities may crowd-out the human and financial resources devoted to high social return commercial banking activities. 6  BIS central bankers’ speeches  Investment banking activities might also piggy-back on the cheaper cost of deposit funding. In effect, universal banking allows privately optimal, but socially sub-optimal, crosssubsidisation. This is a normal-times benefit of separation. Both of these costs were evident ahead of, and during, the recent crisis. Ahead of crisis, resources gravitated to the investment banking side of the fence. Between 2000 and 2007, UK banks’ trading books rose six times as fast as their banking books. Human capital made the same journey, helped by investment banking salaries rising four times as fast as commercial bank salaries since 1980. In the teeth of crisis, risk cross-contamination became a potent factor. Basic banking services in universal banks were often subject to severe disruption from trading book losses, which exceeded by many multiples the capital allocated to them. That is why national deposit insurance schemes were extended and in some cases became temporarily unlimited. It is also why repeated attempts have had to be made to resuscitate weak credit growth over the past few years. So how far will existing structural proposals take us in harnessing these benefits? Volcker, Vickers and Liikanen seek legal, financial and operational separation of activities. So in principle each ought to prevent cross-contamination at crisis time.

So it is for the world’s largest banks. Over the period 2002 to 2007, the implied annual subsidy to the world’s largest banks averaged $ billion per year using a ratingsbased measure (Chart 4). That is roughly 50% of the average post-tax profits of these banks over the period. As the crisis struck, this implicit promise became explicit. Financial support was extended to the banking system in the form of capital injections, guarantees and liquidity insurance. On some estimates, this support rose to three-quarters of annual GDP in some countries. In response to these interventions, there has predictably been a further ratcheting-up in ratingsimplied degrees of state support to banks. By 2009, the ratings difference had more than doubled to above three notches, with the implied monetary subsidy over $ billion per year. That was well in excess of average annual pre-crisis profits of these firms. Even if an over-estimate, the scale of the implied subsidy signalled something dramatic was at play. Too-big-to-fail had become hard-wired into the structure and pricing of the financial system. 3. Systemic surcharges  One way of interpreting these implicit subsidies is as the market’s best guess of how much a policymaker would be willing to pay each year to avoid the failure of the world’s biggest banks. They proxy the expected social costs of big bank failure. In the jargon, they capture a systemic externality. This notion of a systemic externality has underpinned recent academic and policy efforts to solve the too-big-to-fail problem.