economies and market failure may play a role. although the moral hazard associated with tbtf funding is a significant issue, it is also reasonably discrete and susceptible to countervailing policy measures such as capital requirements and credible resolution mechanisms. some strands of finance research suggest more profound implications for certain configurations of financial industry structure. for example, numerous papers suggest that the very large balance sheets of very large financial firms tend to be highly correlated, such that a shock to certain asset classes is likely to reverberate quickly on the balance sheets of most large firms as fire sales and subsequent mark - to - market effects affect even stronger firms. 7 if this conclusion is valid, then the apparent economies associated with very large balance sheets may be transitory or, more precisely, contingent on the absence of serious shocks to certain asset classes. it is precisely at this intersection between questions of industry structure and of the behavior of financial markets that a joint venture between io and finance is most important. as i noted earlier, such an effort could not only help fill out an assessment of the social benefits associated with the size and industry structure of financial firms, but it could also lend insight into the kinds of measures that may be most effective in containing systemic risk. application to specific policy proposals to illustrate more concretely how analysis of scope and scale economies is relevant to the development of a regulatory system designed to safeguard financial stability, i want to turn to three proposals currently being debated in policy circles : ( 1 ) breaking up large financial institutions by reinstating glass - steagall restrictions or by imposing other prohibitions on affiliations of commercial banks with certain business lines ; ( 2 ) placing a cap on the nondeposit liabilities of financial institutions ; and ( 3 ) requiring financial institutions above a specified size to hold minimum amounts of long - term debt available for conversion to equity to avoid or facilitate an orderly resolution of a troubled firm. breaking up firms by business line proposals to reimpose a glass - steagall prohibition on affiliations between commercial and investment banks have been met with the rejoinder that the origins of the financial crisis do not trace back very clearly to these affiliations. many firms at the center of the crisis would have been essentially unchanged had glass - steagall been in effect. bear stearns, lehman brothers, and merrill lynch did not have sizable insured depository institutions, while countrywide and washington mutual had few if any activities that could be termed investment banking. wachovia did have a securities

england, the swiss national bank, and other central banks played important roles in stabilizing and strengthening their respective banking systems. in particular, central banks helped develop and oversee stress tests that assessed banks ’ vulnerabilities and capital needs. these tests proved instrumental in reducing investors ’ uncertainty about banks ’ assets and prospective losses, bolstering confidence in the banking system, and facilitating banks ’ raising of private capital. central banks are also playing an important ongoing role in the development of new international capital and liquidity standards for the banking system that will help protect against future crises. second, beyond necessary measures to stabilize financial markets and banking systems, central banks moved proactively to ease monetary policy to help support their economies. initially, monetary policy was eased through the conventional means of cuts in short - term policy rates, including a coordinated rate cut in october 2008 by the federal reserve, the ecb, and other leading central banks. however, as policy rates approached the zero lower bound, central banks eased policy by additional means. for example, some central banks, including the federal reserve, sought to reduce longer - term interest rates by communicating that policy rates were likely to remain low for some time. a prominent example of the use of central bank communication to further ease policy was the bank of canada ’ s conditional commitment to keep rates near zero until the end of the second quarter of 2010. 1 to provide additional monetary accommodation, several central banks – among them the federal reserve, the bank of england, the ecb, and the bank of japan – purchased significant quantities of financial assets, including government debt, mortgage - backed securities, or covered bonds, depending on the central bank. asset purchases seem to have been effective in easing financial conditions ; for example, the evidence suggests that such purchases significantly lowered longer - term interest rates in both the united states and the united kingdom. 2 although the efforts of central banks to stabilize the financial system and provide monetary accommodation helped set the stage for recovery, economic growth rates in the advanced economies have been relatively weak. of course, the economic outlook varies importantly by country and region, and the policy responses to these developments among central banks have differed accordingly. in the united states, we have seen a slowing of the pace of expansion since earlier this year. the unemployment rate has remained close to 10 percent since mid - 2009, with a substantial fraction of the unemployed out of work for six months or longer. moreover, inflation has been declining and is currently quite low, with measures of