of the 1990s and 2000s. and indeed, expectations of bailouts were generally right. very few banks were allowed to go into insolvency in the global financial crisis. lehman was very much the exception that proved the rule. the impact of lehman ’ s failure revealed that things had not moved on since continental illinois ; the official machinery in most jurisdictions was completely unable to handle the failure of a large – or in the uk case even a medium - sized – banks in a way that did not pose risks to the financial system. so in most cases banks were bailed out. the risks of contagion, loss of confidence in the system and disruption to the provision of banking to the economy were simply too great. but the costs had grown since the continental illinois episode of the 1980s. in the uk, for example, the banking sector had grown from around 100 % of gdp to more than 500 % of gdp in 2008. and the uk government had to inject 13 times more money into rbs than had been injected into continental illinois. 6 is too big to fail inevitable? the post - crisis period has seen a vast amount of work to come up with a better way to deal with a failed bank and a better answer than ‘ the taxpayer ’ to the question of ‘ who pays? ’ some have argued that it cannot be done. the crisis, they argue, showed that large, complex banks do indeed have to keep operating. they are too interconnected and provide too large a share of essential services to the economy to be allowed to abruptly stop operating. this line of argument leads to the conclusion that if we want to end too big to fail, we need to end being big itself. we need to go back to a world of small, less complex banks. with the help of deposit insurance, these could be wound up quickly and simply without great disruption to the economy and society as a whole. a world of smaller, simple banks may appear tempting. but something important would i think be lost. as the independent commission on banking argued in their report, splitting up banks would reduce diversification benefits. 7 while the cost of failure of small banks may be lower, these banks may hence be more likely to fail. and a large number could fail simultaneously if they take on correlated risks, as was the case in the us savings and loans crisis in the 1980s. something else might be lost : banking relies on information. large, multinational banks can use their existing customer knowledge to offer a customer services

. ” but such a huge expansion in the balance sheet was by no means simple to execute, nor risk - free. like any other business, especially one in the public sector, the central bank needs to protect its own balance sheet. the consequence of a significant loss could be to damage credibility, threaten independence and impair the central bank ’ s ability to discharge its statutory responsibilities. a central bank will also be keen to avoid the moral hazard involved in encouraging a commercial firm to undertake particular types of risk - taking activity. there are certain principles that a central bank should therefore observe : it should not lend to any bank whose prospective solvency is seriously in question. it should always take sufficient, good - quality collateral against its lending. central bank operations should be designed to deliver public policy objectives, not to support the profitability of any particular commercial firm. see the “ the framework for the bank of england ’ s operations in the sterling money markets ( the ‘ red book ’ ) ” at http : / / www. bankofengland. co. uk / markets / sterlingoperations / redbook. htm see fisher ( 2010 ), “ managing liquidity in the system : the bank ’ s liquidity insurance facilities ” at http : / / www. bankofengland. co. uk / publications / speeches / 2010 / speech450. pdf bis central bankers ’ speeches bank of england consolidated balance sheet ( a ) chart 1 : liabilities chart 2 : assets £ billions £ billions notes in circulation long - term repos short - term repos reserve balances other liabilities loan to apf other assets ( a ) data to 16 march 2011 that may sound like a simple set of rules, but there are deep policy issues to consider when it comes to implementation. in particular, there are policy decisions required in the following dimensions : ( i ) eligibility ( what collateral should be accepted, and what should not ) ; ( ii ) valuations and haircuts ( how much is the collateral worth? ) ; ( iii ) what fees should apply, if any, and ( iv ) limits ( how much diversification should we seek across the collateral delivered? ). these are important questions for the banking system as a whole, and have presented new and complex risk management challenges for central banks over the past few years. it is on these issues that we focus in this paper. 3 to start with, we briefly outline some of the main features of the bank ’ s lending operations.