Second, we could impose higher capital requirements on large, systemically important institutions to offset the advantages such as lower funding costs that these institutions may garner by their perceived “too big to fail” status. This would recognize the interconnectedness of the financial system and the fact that the failure of a systemically important institution generates significant externalities, which are not, at present, borne fully by the equity and debt holders of such institutions. Increasing the size of the capital buffer would make the system more stable by reducing the incentive for firms to get big just to capture the perceived benefits from achieving “too big to fail” status. The first change – an improved resolution mechanism – would presumably reduce the number of institutions that – at any point in time – would be systemically important. The second change – the imposition of higher capital requirements on large, systemically important institutions – would reduce the likelihood of failure of such institutions. However, in assessing the efficacy of such changes, we need to be realistic about the difficulties in building a resolution regime that would be sufficiently robust to allow the failure of any institution under any circumstance and in designing a capital regime that imposes  BIS Review 125/2009  5  differential requirements on large, systemically important institutions. On the resolution regime side of the ledger, it is particularly difficult to build resolution regimes that can operate effectively across different geographic jurisdictions.

Second, the Anglo-Saxon model, prevailing in the United Kingdom and Ireland: in this model, the welfare system provides a relatively limited safety net of social protection. Employment protection legislation is rather weak, recipients of benefits have to be actively searching for employment and flexibility in labour markets is considerable. Unionisation is low and there is a rather large dispersion in wages between very low pay and very high salaries. Overall, this model has a good record of generating growth and employment, but does not appear as equitable as other models. Third, in Germany, France, Belgium, Luxembourg and Austria, the Continental model prevails. Here, the welfare state essentially consists of insurance-based unemployment benefit and pensions systems, meaning transfers are seen as unconditional entitlements, which influence the propensity to actively seek work. Trade unions, despite a general weakening over the past years, are still influential, and income disparity is relatively low. The Continental model seems to insure people relatively well against poverty but it may do so with less efficiency and unsustainably: low levels of labour utilisation (in terms of the number of people employed and hours worked) and a relatively large public sector have put pressure on public finances. Fourth, the Mediterranean model, which can be identified in Greece, Italy, Portugal and Spain. Strict employment protection legislation and early retirement schemes keep employment levels below those of other models, because insiders are protected and incentives to take up work are not adequate.