instead, it appears we have been instructed to add any increased systemic risk to the list of adverse effects that could result from the merger and then determine whether the benefits to the public of the acquisition outweigh these adverse effects. if, for example, there are few indications that scale or scope efficiencies would be gained, then anticipated adverse effects on systemic stability could be expected to have a greater impact on our ultimate decision. if, on the other hand, there are genuine scale or scope efficiencies to be realized, then a more complicated set of trade - offs may be needed. the more developed our knowledge about economies of scale and scope in large financial conglomerates becomes, the more nuanced an analysis of these effects we will be able to make. the new authority for orderly liquidation of systemically important institutions is a second example of a systemic regulation in which an understanding of scale and scope is important. at least some advocates of orderly liquidation regimes seem to favor resolution plans that silo activities as much as possible. however, in the presence of significant economies of scope, this approach might result in loss of efficient forms of organization. in these circumstances, resolution plans that seek to preserve the scope economies even as a firm is dismembered might result in better liquidation outcomes. in addition, siloing activities in the context of a resolution plan could affect day - to - day operations during normal times and might for a review of recent literature on these topics, see financial stability oversight council ( 2011 ), study of the effects of size and complexity of financial institutions on capital market efficiency and economic growth ( washington : financial stability oversight council, january ). also see, loretta mester ( 2010 ), “ scale economies in banking and financial regulatory reform, ” federal reserve bank of minneapolis, the region, vol. 24 ( september ), pp. 10 – 13. bis central bankers ’ speeches reduce efficiency by preventing firms from realizing economies of scope, resulting in increased costs of financial services for households and businesses. both these examples suggest how regulators might, in certain instances, be required to make trade - offs between systemic risk and efficiency considerations. an additional concern would arise if some countries made the trade - off by limiting the size or configuration of their financial firms for systemic risk reasons at the cost of realizing genuine economies of scope or scale, while other countries did not. in this case, firms from the first group of countries might well be at a competitive disadvantage in the provision of certain cross

advantages enjoyed by large firms ; possible diseconomies of scope resulting from firm bis central bankers ’ speeches complexity ; and the effect of market concentration and firm size on intra - and inter - firm diversification. as i noted earlier, there has also been a considerable amount of work on scale economies in commercial banking. 2 however, more needs to be done on these and other subjects. indeed, from a policy perspective, the value of some of the scholarship done to date may be limited. for example, if funding - cost advantages in fact derive from market perceptions that a very large firm was too - big - to - fail, the phenomenon is really one of competitive advantage grounded in moral hazard, not one of true efficiencies. similarly, the use of profitability of large firms as a surrogate for efficiency – as found in some studies – would be more helpful for policymaking if researchers find a way to control for the possibility that higher revenues are associated with market power or branding. let me illustrate with two examples how these issues of scale and scope economies relate to the increased regulatory emphasis on systemic risk. first is the federal reserve ’ s review of proposed mergers and acquisitions under the bank holding company act. of course, economies of scale and scope have always played a part in the analysis of the competitive effects of proposed mergers. but the dodd - frank act now requires that we also consider whether a proposed merger would lead to greater or more concentrated risks to financial stability. consider, for instance, how we would evaluate the financial stability effects of a proposed merger of two medium - sized institutions. among other things, we would need to assess the expansion of the acquiring institution ’ s systemic footprint. then, we would have to balance the potential increased costs across the system were the institution to fail against the potential benefits from either a lesser likelihood of failure or, with respect to essential financial functions, a greater capacity to step in and fill the gap if one of the firms ’ large competitors were to fail. in performing these kinds of analyses, we will draw on the extensive work on systemic risk we have already done in connection with our development of capital requirements, the designation of systemically important firms by the financial stability oversight council, and other matters. it is important to note that, while congress instructed us to consider the extent to which a proposed acquisition would pose a greater risk to financial stability, it clearly did not instruct us to reject an acquisition simply because there would be any increase in such risks.