with recent econometric evidence suggesting that growth is harmed at debt - to - gdp ratios above unity, for both the public sector ( reinhart and rogoff ( 2010 ) ) and private sectors ( cechetti et al ( 2011 ) ). bis central bankers ’ speeches the difference between these ratings gives an estimate, used by the market when pricing debt, of the probability of state support. chart 3 plots the difference between these ratings for the 29 institutions deemed by the financial stability board ( fsb ) last year to be the world ’ s most systemically - important. in the pre - crisis period, this difference averaged 1. 3 notches. this sounds material, if not breathtaking. it suggests that, while non - trivial, too - big - to - fail may not have been a first - order driver of the rising scale and concentration in banking. yet even small notches of support can translate into big implicit subsidies if balance sheets are large. 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 $ 70 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 $ 700 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

( fisher ( 2011 ), hoenig ( 2012 ), johnson and kwak ( 2010 ) ), tarullo ( 2012 ) ). full structural separation of investment and commercial banking, a modern - day glasssteagall act, has continued to attract support. the main benefit this would bring, relative to structural ring - fencing, is that it would eliminate loopholes from the ring - fence and better ensure that the distinct cultures of retail and investment banking were not crosscontaminated. that would lessen the risk of basic banking activities being starved of human or financial capital, both ahead of and during crisis. 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. early studies, using data from the 1980s, failed to find scale economies much beyond bank asset sizes of around $ 100 million ( pulley and braunstein ( 1992 ) ). empirical studies in the 1990s nudged up the optimal bank scale to around $ 10 billion ( amel et al ( 2004 )