Full separation may also be operationally simpler to implement than the existing structural proposals. Finally, enhanced banking competition would potentially help to reduce some of the problems of too-big-to-fail by reducing the degree of banking concentration. Greater exit from banking, through enhanced resolution regimes, can help. But a bigger problem still is bank entry: the UK went 100 years without a new retail bank being set up. One potential barrier to banking entry is the difficulty of switching deposit accounts and loan contracts. A shared banking platform, containing customer account details, would dramatically reduce the frictions in search and switch for deposit and loan products for customers (Leadsom (2012)). It could lower materially barriers for new banking entrants. A powerful counter-argument to all of these more radical proposals is that they could erode the economies of scale and scope associated with large banks. These economies clearly do exist in banking, as they do in other industries. For example, fixed costs are large in finance and spreading them widely ought to deliver productivity improvements. The interesting question is at what point these economies of scale are exhausted. Indeed, informational and managerial diseconomies of scale are likely at some scale, whatever the business line. In his classic theorem, Ronald Coase tells us that firms will seek a privatelyoptimal size which balances the benefits of economies of scale against these diseconomies (Coase 1937)). How does all of this apply in banking? The empirical evidence on economies of scale and scope in banking is surprisingly patchy.

Without that, human and financial resource allocation either side of the ring-fence will become blurred. For example, without separate debt issuance for retail and investment banking, the cost of debt for a big bank will be a blended mix. The implicit subsidy in funding costs would then remain and with it one of the main distortions associated with too-big-to-fail. Only time will tell whether cultural separation can be achieved under the existing structural reform proposals. In the go-go years, will these reforms be sufficient to prevent the grass always appearing greener on the riskier side of the (ring-)fence? This is the acid test of the structural reform agenda. Where next? Progress has been made over the past few years towards eliminating too-big-to-fail, with further progress on implementation planned. But today’s task is even more daunting than before the crisis. The big banks are even bigger. The system itself is more concentrated. And  BIS central bankers’ speeches  7  despite reform efforts, the market’s best guess today about tomorrow’s implicit subsidy is farlarger than before the crisis struck, at over $ billion per year (Chart 3). The market believes that illicit state promise is even more likely to be kept. The wrong conclusion to draw would be that existing reforms have failed or are unnecessary – quite the contrary. Rather it is that these reform initiatives, while necessary, may be insufficient to eliminate the too-big-to-fail externality. If so, what are the alternatives? Several have been mooted. Re-sizing the capital surcharge is one possibility.