This is done by mapping from ratings to the yields paid on banks’ bonds; 6 and by then scaling the yield difference by the value of each banks’ ratings-sensitive liabilities. 7 The resulting money amount is an estimate of the reduction in banks’ funding costs which arises from the perceived government subsidy. Table 4 shows the estimated value of that subsidy for the same sample of UK and global banks, again between 2007 and 2009. For UK banks, the average annual subsidy for the top five banks over these years was over £ billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $ billion per year. These are not small sums. Table 4 also splits UK banks and building societies into “Big 5”, “medium” and “small” buckets. As might be expected, the large banks account for over 90% of the total implied subsidy. On these metrics, the too-big-to-fail problem results in a real and on-going cost to the taxpayer and a real and on-going windfall for the banks. If it were ever possible to mint a coin big enough, these would be the two sides of it. These results are no more than illustrative – for example, they make no allowance for subsidies arising on retail deposits. Nonetheless, studies using different methods have found similarly-sized subsidies.
Each has a potentially important bearing on systemic resilience and hence on the social benefits of restrictions. (a)  Modularity  In 1973, Nobel-prizing winning economist Robert Merton showed that the value of a portfolio of options is at least as great as the value of an option on the portfolio. 15 On the face of it, this seems to fly in the face of modern portfolio theory, of which Merton himself was of course one of the key architects. Whatever happened to the benefits of portfolio diversification? The answer can be found in an unlikely source – Al’Qaeda. Although the precise organisational form of Al’Qaeda is not known with certainty, two structural characteristics are clear. First, it operates not as a centralised, integrated organisation but rather as a highly decentralised and loose network of small terrorist cells. Second, as events have shown, Al’Qaeda has exhibited considerable systemic resilience in the face of repeated and on-going attempts to bring about its collapse. These two characteristics are closely connected. A series of decentralised cells, loosely bonded, make infiltration of the entire Al’Qaeda network extremely unlikely. If any one cell is incapacitated, the likelihood of this undermining the operations of other cells is severely reduced. That, of course, is precisely why Al’Qaeda has chosen this organisational form. 15  6  Merton (1973). BIS Review 40/2010  Al’Qaeda is a prime example of modularity and its effects in strengthening systemic resilience.