Opposition to infrastructure reform by those firms that have in the past benefited from complexity and lack of transparency must be firmly overcome. At the same time, we need to keep in mind that central counterparties themselves can become single points of failure, with potentially devastating consequences. Central counterparties must therefore have sufficient financial resources to withstand the default of the largest participants. Operators and regulators should carefully evaluate the adequacy of the risk management models and financial resources of central counterparties. Only if central counterparties are financially sound can they play their critical role in preserving financial stability. Finally, as an ultimate resort, we cannot ignore the need to consider measures that address the size of banks, indirectly or directly. 13 Admittedly, there are some benefits from size. But the empirical evidence suggests that these benefits are rather limited. Economies of scale, whereby larger amounts can be produced at lower average cost, already appear to have been exhausted in the case of relatively small banks. 14 Obviously, banking systems made up of only small banks are not immune to crisis episodes. But let us not make the mistake of using another problem as an excuse to shy away from the severe moral hazard problem associated with the largest banks. It is also sometimes argued that interconnectedness matters more than size when it comes to systemic importance. It is evident that both size and interconnectedness matter. Recent empirical evidence, however, indicates that systemic importance increases more than proportionately with size.
Equally, the most prominent banks should invest their efforts, not in resisting fundamental change, but in genuinely supporting the work to bring it about, in the interests of a more longterm and less volatile global banking and, ultimately, economic growth model. If we fail to reform fundamentally the financial system and the position of the largest systemically relevant firms in that system, we will undermine one of the most basic mechanisms of any market economy, namely that of punishing failure. What is more, we will – to quote Mervyn King – bequeath to future generations a serious risk of enduring another crisis even worse than the one we have just experienced. 16 My biggest concern is that a future crisis on a larger scale could create such an immense regulatory and protectionist  16  Speech by Mervyn King to Scottish business organisations, Edinburgh, 20 October 2009. BIS Review 145/2009  7  backlash, that the very market-based system, on which so much of our current welfare is based, will be threatened. In that sense, it is in the long-term interest of banks themselves to support the far-reaching efforts to make the financial system more resilient. If our reform efforts falter, we risk having to look back one day at the vast and unprecedented stabilisation efforts undertaken by so many governments and central banks and conclude that they were short-sighted.