##eous application of tailor - made separation based on the credibility of the recovery and resolution plans of individual banks. thus avenue 2 includes uniform separation ex ante in order to facilitate resolution of large and complex banks without public funds and hence reduce the too - big - to - fail problem. structural reform proposal for europe [ slide 16 – rationale for mandatory separation ] our group came to the conclusion that although the regulatory reforms already implemented or in progress take us a major step forward, not enough has been done to eliminate the too - big - to - fail problem. structural measures aimed at the largest banks and banks with significant trading activity are thus needed to complement them. 15 i will also argue that structural reforms support the creation of the banking union. more precisely, we found that the benefits of separation are the following. our group ’ s proposal focuses much on limiting the spillover of benefits from safety nets such as the deposit insurance to outside the core banking activities thus reducing the incentives for banks to become too - big - to - fail in the first place. separation will restrict risktaking opportunities of a deposit bank. the blending of the commercial and investment banking management cultures will also be reduced, which reduces the risk - taking incentives in traditional banking, evident in the years preceding the crisis. moreover, limiting the spillover of benefits from safety nets to outside the core banking activities will reduce risk - taking incentives and incentives for excessive growth in the trading entity. this is because the funding of the trading entity will be subject to more effective market discipline in the absence of insured deposits. recall that the group proposed an initial two - step threshold approach where the bank would advance to the second stage if its assets held for trading and available for sale exceed ( 1 ) a relative examination threshold of 15 – 25 % of the bank ’ s total assets or ( 2 ) an absolute examination threshold of eur100bn. bis central bankers ’ speeches reducing complexity by means of separation facilitates monitoring by outside stakeholders such as shareholders, bank creditors and other market participants, thus further reinforcing market discipline. reduced complexity by means of separation also has benefits for stakeholders closer to the bank. in the group we argued that it would facilitate the task of the management and the board as steering effort to the right direction by means of incentive schemes, for example, is easier in a less complex organisation, where the organisational units are more homogeneous. a more primitive benefit of separation is that reduced complexity makes it easier to understand the bank. this is a line

##ylised classification of structural proposals : activities and strength ] ecb official prepares to perform triage on europe ’ s banks, interview with ignazio angeloni in international new york times 21. 10. 2013. gandhi and lustig, “ size anomalies in u. s. bank stock returns ” doi : 10. 1111 / jofi. 12119. bis central bankers ’ speeches on capital requirements another important issue which has been much discussed also recently is that regulations need to be robust enough. robustness of capital requirements is needed because there will always be errors in risk measurement, and managerial incentives to manipulate riskweights downwards will always be there. 18 one answer is to add capital requirements which are not based on risk - weights, to complement the risk - based ones. an important example is the leverage ratio requirement of basel iii. our group also considered, although did not directly propose, additional robust capital requirements on trading activities. if these were calibrated so that the robust requirements formed the bottom and the risk - based requirements came on top of that, then banks ’ incentives to keep on improving their risk measurement technologies might be better maintained. the basel committee on banking supervision is still considering the merits of introducing the standardised approach as a floor or surcharge to the models - based approach. 19 of the proposals for how the market risk framework could be altered recently presented by the basel committee, i particularly welcome two key features. first, the suggestion of revising the standardised approach to be sufficiently risk - sensitive thus creating a credible alternative to the internal models. and second, the requirement of mandatory calculation and publication of the standardised approach by all banks, which would improve transparency and comparability. note that separation of trading - based risks from deposit banking can also be seen as a form of robust regulation. if potential errors in the measurement of trading risks may prove fatal to core banking services, it may be better to move the risks elsewhere altogether. this is what separation does : it compartmentalizes risks within the banking group, a bit like firewalls help restrict the spreading of fire. a combination of structural reforms with capital and liquidity buffers may be a cost - effective way of regulation in the long - run. taking into account both public and private costs, bank equity capital is not as costly as one might deduce from banks ’ preference to use very high levels of debt financing. this point has been carefully scrutinized by admati and