And it could do this without actually solving the problem of system risk externalities that aren’t related to balance sheet size. 8  BIS central bankers’ speeches  Evaluating the socially optimal size, scope and organizational structure of financial firms is a complicated business, and so is establishing a viable transition path to a system of much smaller firms. It would be helpful in this regard if advocates of break-up solutions would put a bit more flesh on the bones and develop detailed proposals that address essential questions of how such downsizing or functional separation would be accomplished, and what benefits and costs could be expected. Such an analysis should answer several questions: How would you force divestiture (in good times and bad)? Should firms be split up by activity or reduced pro-rata in size? How much would they have to be shrunk in order for the externalities of failure to no longer create TBTF problems? How would global trading and investment banking services and network-type activities be supported? Should some activities be retained in natural monopoly form, but subject to utility type regulation? How costly would it be to replicate support services or to manage liquidity and capital locally? Are there ways of designing size limits that cannot be arbitraged by banks via off-balance-sheet structures and other forms of financial innovation? So far, advocacy for the break-up path has been strong, but without the detail to assess whether this is indeed superior to the course we are currently following. But, I’m openminded.

“Hard” infrastructure refers to the physical equipment, software and networks supporting those markets. See “Open Forum: Building real markets for the good of the people”, http://www.bankofengland.co.uk/ markets/Documents/openforum.pdf. 2  http://www.bankofengland.co.uk/publications/Pages/news/2016/071.aspx. 2  BIS central bankers’ speeches  independent CREST research project later in the day, which has reached very similar conclusions 3. Table 1 Key lessons for success from the crest project  All successful projects need a clear platform for change – and CREST had a burning one! The collapse of TAURUS on 11 March 1993, followed by the resignation of Peter Rawlings, the Chief Executive of the Stock Exchange, was front page news. The huge rancour, reputational damage and cost (estimated by the FT at £ all-in, in mid-1990s money) cast a pall over the UK financial system, already reeling from the failed attempts to defend  3  “From Paper to Automation – Streamlining UK Securities Settlement”, at http://www.globalservices.bt.com/ static/assets/pdf/products/financial_markets_settlenet/CREST-BISS-Industry-Report-final-for-publication.pdf. BIS central bankers’ speeches  3  sterling on “Black Wednesday” and the publication of the BCCI Report in 1992, and facing renewed competition from financial centres in continental Europe and elsewhere. Without TAURUS, the UK was left with what one leading fund manager gloomily described as a “Third World settlement system in a first-rank financial centre”. Equity settlement relied entirely on paper certificates, passing through an average of 25 pairs of hands for each trade, each time running the risk of getting lost, misfiled or stolen. Settlement occurred only once a fortnight, and on a fixed rather than a rolling timetable.