they collectively pose to the financial system. third, the costs incurred in breaking up such firms also need to be considered. others have argued in favor of separating commercial and investment banking activities of the large banks. in my opinion, there are shortcomings to re - imposing glass - steagall - type activity restrictions. it is not obvious to me that the pairing of securities and banking businesses was an important causal element behind the financial crisis. in fact, independent investment banks were much more vulnerable during 2008 than the universal banking firms which conducted both banking and securities activities. more important is to address the well - known sources of instability in wholesale funding markets and to give careful consideration to whether there should be a more robust lender of last resort regime for securities activities. evaluating the socially optimal size, scope and organizational structure of financial firms is a complicated exercise, and so is establishing a viable transition path to a system of much smaller banks. it would be helpful in this regard if advocates of the break - up solutions would develop detailed proposals that address the essential questions of how such downsizing or functional separation would be accomplished, and what the expected benefits and costs could be from such a restructuring. the recent financial crisis underscores the importance of financial stability as a necessary condition for a vibrant economy. an important element in improving financial stability is to reduce the expected loss associated with the failure of any financial firm to the point where default does not imperil the financial system and the real economy. a holistic approach is needed that both provides a credible resolution process for large, complex and interconnected banks, uses enhanced prudential standards and initiatives to further reduce the probability of default and the social losses associated with a default, and that incents management to intervene early to address incipient problems before they threaten the viability of the firm. relying solely on resolution is not sufficient. until the title ii resolution process is used, there will remain uncertainties regarding how well this approach will work in practice – especially in a time of market stress. for this reason it is also important to continue to pursue a number of alternative approaches. thank you for your kind attention. i would be happy to answer a few questions. bis central bankers ’ speeches

liquidity requirements, which we are implementing, but also building incentives into the system so that firm managements will act more forcefully and much earlier to put their firms on more solid ground before they encounter greater difficulties. finally, i am not yet convinced that breaking up large, complex firms is the right approach. in particular, these firms presumably exist, in large part, because there are scale or network effects that allow these firms to offer certain types of services that have value to their global clients. these benefits might be lost or diminished if such firms were broken up. in addition, the costs incurred in breaking up such firms need to be considered. finally, the breakup of such firms would not necessarily result in a significant reduction in overall systemic risk if the resulting component firms were still, collectively, systemic. as always, what i have to say reflects my own views and not necessarily those of the federal reserve system. defining the too big to fail problem the root cause of the too big to fail problem is the fact that the failure of a large, complex financial firm is likely to generate significant, undesirable externalities. these include disruption to the ability of the financial system to provide credit and other essential financial bis central bankers ’ speeches services to households and businesses. when this happens, not only is the financial sector adversely affected, but its troubles spill over and harm the real economy. although there are negative externalities associated with the failure of any financial firm, these externalities are disproportionately more damaging in the case of large, complex and interconnected firms. however, despite the label, too big to fail, the magnitude of these externalities does not depend simply on size. the extent of the externalities also depends on the particular mix of business activities and the degree of interconnectedness with the rest of the financial industry. one significant element is the importance of the services the firm provides to the broader financial system and the economy, as well as the ease with which its customers can move their business to other providers. another element is the extent to which the firm ’ s structure and activities create the potential for contagion – that is, the potential that a problem at one firm could spread more broadly through the financial system. contagion might occur along several different pathways, including the direct losses imposed by failure on the firm ’ s counterparties, the impact of the failure on the asset prices held by other leveraged financial institutions, or a loss of confidence spreading to other