It is argued that separating commercial and investment banking would abolish this subsidy, align incentives for investment banks and force them to reduce the size of their business. The second aspect is the existence of implicit government guarantees for certain banks. If a large and interconnected universal bank fails, the whole financial system might be disrupted, as might the real economy.
The taxpayer might therefore be forced to step in and save the bank to prevent an even worse outcome. Banks that enjoy such a status are termed “too big to fail” or “too interconnected to fail”. Just like deposit insurance, such an implicit government guarantee subsidises investment banking activities.