If these institutions could be resolved easily, so that the systemic consequences of their failure were limited, efficiency considerations could perhaps be set to one side. Or, put in Weitzman’s terms, the social benefits of cutting banks down to size would be low. But crisis experience has demonstrated that the apparatus does not currently exist to resolve safely these institutions. There are no examples during this crisis of financial institutions  38  Laeven and Levine (2007); see also Schmid and Walter (2009) for recent US evidence. 39  Robinson (1934). 40  Christakis and Fowler (2009). 41  Dunbar (1993). 12  BIS Review 40/2010  beyond $ billion being resolved without serious systemic spillovers. 42 Instead, those in trouble have been bailed-out. The same 145 institutions account for over 90% of the support offered by governments during the course of the crisis. In the light of the crisis, and in the language of Weitzman, the marginal social benefits of restrictions could be greater than the marginal private costs. The maximum efficient scale of banking may lie below the maximum resolvable scale. A large part of the effort of the international community over the past few years has been directed at increasing the maximum resolvable scale of banks – for example, through improved resolution regimes and living wills. 43 If successful, that effort would shift the balance of the Weitzman cost/benefit calculus in the direction of bigger banks; it could help achieve the modularity, robustness and better aligned incentives which restrictions otherwise deliver.
Finally, the Riegle-Neal Act of 1994, which took effect in 1997, largely lifted restrictions on interstate branching for both domestic BHCs and foreign banks. The rationale for this change of heart was a mirror-image of the 1920s. Large banks convinced politicians of the high private costs of restrictions, which inhibited the efficiency of their offering to the public. In Weitzman’s framework, private costs trumped social benefits. The effects of the removal of interstate restrictions were dramatic. The average size of US banks, relative to GDP, has risen roughly threefold over the past 20 years (Chart 1). Too-bigto-fail was reborn in a new guise. The US Banking Act (1933) was co-sponsored by Senator Carter Glass and Representative Henry Steagall – hence “Glass-Steagall”. It prevented commercial banks from conducting most types of securities business, including principal trading, underwriting and securities lending. It also banned investment banks from taking deposits. The key functions of commercial and investment banking were effectively prised apart. The Act was motivated by stability concerns in the light of the Great Depression. The stock market boom of the 1920s had been fuelled by cheap credit from the banks. The stock market crash of 1929 brought that, and a great many US banks, to a shuddering halt. Among many banks, net losses on securities were as great as losses on loans. These losses transmitted to the real economy through a collapse in lending, whose stock halved between 1929 and 1933.