40 The number of relationships humans are felt able to maintain is believed to lie below 150 – so-called Dunbar’s Law. 41 For most of us, it is singledigits. That number has been roughly the same since the dawn of time, despite the extraordinary recent advance of technology and social networks. As Nicholas Christakis has observed, Facebook “friends” are not really your friends. With hindsight, this crisis has provided many examples of failures rooted in an exaggerated sense of knowledge and control. Risks and counterparty relationships outstripped banks’ ability to manage them. Servers outpaced synapses. Large banks grew to comprise several thousand distinct legal entities. When Lehman Brothers failed, it had almost one million open derivatives contracts – the financial equivalent of Facebook friends. Whatever the technology budget, it is questionable whether any man’s mind or memory could cope with such complexity. To sum up, the maximum efficient scale of banking could be relatively modest. Perhaps it lies below $ billion. Experience suggests there is at least a possibility of diseconomies of scale lying in wait beyond that point. Conglomerate banking, while good on paper, appears to be more mixed in practice. If these are not inconvenient truths, they are at least sobering conjectures. They also sit awkwardly with the current configuration of banking. In 2008, 145 banks globally had assets above $ billion, most of them universal banks combining multiple business activities. Together, these institutions account for 85% of the assets of the world’s top 1000 banks ranked by Tier 1 capital.
Simpler financial eco-systems offer the promise of greater robustness, at some cost in richness. In the light of a costly financial crisis, both eco-systems should be explored in seeking answers to the $ billion question. 42  Washington Mutual, with assets of around $ was resolved by FDIC, but was perceived by many to have caused systemic spillovers. 43  For example, Tucker (2010). BIS Review 40/2010  13  References Aikman, D, Barrett, P, Kapadia, S, King, M, Proudman, J, Taylor, T, de Weymarn, I, and T Yates (2010), Uncertainty in Macroeconomic Policy Making: Art or Science?, available at http://www.bankofengland.co.uk/publications/speeches/2010/speech432.pdf Amel, D, Barnes, C, Panetta, F and C Salleo (2004), “Consolidation and Efficiency in the Financial Sector: A Review of the International Evidence”, Journal of Banking & Finance, vol. 28(10). Baker, D and T McArthur (2009), “The Value of the ‘Too Big to Fail’ Big bank Subsidy”, Centre for Economic and Policy Research. Barro, R J (2006), “Rare Disasters and Asset Markets in the Twentieth Century”, Quarterly Journal of Economics, vol. 121(3), p.823–866. Barth, J R, Caprio Jr., and R Levine (2004), “Bank Supervision and Regulation: What Works Best?”, Journal of Financial Intermediation, vol. 13(2), p.205–248. Basel Committee on Banking Supervision (2009), Consultative Document: Strengthening the Resilience of the Banking Sector. Beale, N, Rand, D, Arinaminpathy, N and R M May (2009), Conflicts Between Individual and Systemic Risk in Banking and Other Systems, forthcoming.