. in addition, breaking up the banks would reduce their potential to diversify. this, in turn, could increase their exposure to individual shocks – they might even become less safe. the second question is : would breaking up the banks limit the size of investment banks by removing funding subsidies? well, it certainly would remove at least those subsidies related to deposit insurance. but there are two things we should bear in mind. first, if deprived of deposits as a source of funding, an increasing number of pure investment banks would have to revert to less stable sources of funding – they would become less safe. second, what about that part of the subsidy that is due to implicit government guarantees? this point relates to our second line of defence – to the question of whether a bank can fail without disrupting the whole system. and frankly, i am not fully convinced that breaking up the banks would block the relevant channels of contagion. true, it would block channels of contagion within banks. but wouldn ’ t they just be replaced by channels of contagion between banks? i think that even after breaking up the banks, the financial system would be characterised by a large degree of interconnectedness. and again, we could take a look into history. lehman brothers was a pure investment bank, yet when it failed in 2008 it brought the financial system to the brink of collapse – because it was so interconnected. against this backdrop, the question is : what would happen if another pure investment bank were to fail? would the government really just stand on the side - lines and watch the potential fallout? or would it be compelled to step in, as it has done before, to save the failing bank – regardless of whether it is attached to a commercial bank or not? and what about the problem of shadow banking? i see the danger that breaking up the banks might provide incentives to export more and more risky activities to the realm of nonbank banking. however, the risks could easily be re - imported to the regular banking system. in the end, we would have gained nothing. this is why our efforts to control the shadow banking system have to continue. regarding the proposal to break up the banks, a lot of questions on the effects and sideeffects remain unanswered. and this takes me directly to the last issue i wish to raise. we all know that the worst enemy of good ideas is the need to implement them. in the present case, this refers to the challenge

small business ’ personal computer has obvious possible implications for the reasonableness of using a local geographic market. while current usage of pc banking is too small to affect our methodology significantly, in my judgment this is clearly an area that we need to monitor and study, and, if necessary, be prepared to adapt our procedures accordingly. in this regard, i would note that good data on the use of pc banking by households and small businesses is a must. electronic banking raises similar issues for our evaluation of the community reinvestment act performance of banks. here again, a fundamental aspect of our current approach is definition of the relevant geographic area. these are complex topics and the jury is still clearly out, but, in my view, they are areas that deserve careful watching. federal reserve payments system role clearly, an efficient and smoothly functioning payments system is critical to the health and stability of the financial markets and the economy more broadly. although there is surely room for continuing improvement, the u. s. payments system fares quite well when compared to other countries. as the central bank, the federal reserve has a keen interest in fostering continuing improvements in the efficiency and integrity of the u. s. payments system. we work to achieve this objective through several important payments system roles, those of regulator, service provider, and facilitator. as regulator, we are always open to your suggestions for revisiting regulations that may pose impediments to payments system innovations. in considering changes to existing regulations, we would assess how the change might affect the public good. for example, is the original public policy rationale for the regulation no longer fully valid? would the proposed change make society better off? as service provider, the federal reserve is working closely with the industry to enhance the ach marketing and education that is needed to substantially increase market penetration. the market research that i discussed earlier is important in helping to focus these efforts. in addition, the reserve banks are providing ach edi transaction capability to all customers to facilitate the use of the ach for vendor payments. in the check service, the reserve banks are presenting an increasing number of checks electronically ( ecp currently represents about 14 percent of fed check collection volume ), are introducing a wider array of check image services, and are developing pilot programs to learn more about ecp. to facilitate the settlement of transactions that clear outside the federal reserve, the reserve banks will soon be introducing an enhanced net settlement service, which provides better finality, security,