While the focus of debate so far has been on the costs of this disruption, largely in the form of disintermediation of existing agents, there are significant potential benefits to be had too. Specifically, this could lead to a closer alignment of risk for those institutions, new and old, offering these services - narrow banking for payments (money backed by safe assets) and limited purpose banking for lending (risky assets backed by risky liabilities). This radically different topology, while not costless, would reduce at source the fragilities in the banking model that have been causing financial crises for over 800 years. Given the costs of those crises – large and rising – this is a benefit that needs to be weighed. On monetary policy, the most important constraint facing policymakers today is the (close to) zero lower bound (ZLB) on interest rates. At root, the ZLB arises from a technological constraint – the inability to pay or receive interest on physical cash. This is a technological constraint that every form of money, other than  28  For more information on the work the Bank of England is doing, see two discussion papers here and here. Haldane (2007). 30 Bank of England (2021) 29  17  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  17  cash, has long since side-stepped.
Recently, a debate has begun on direct restrictions on some banking activities – in other words, prohibition. This is recognition of the social costs of systemic risk. Bankers are in uproar. This paper examines the costs of banking pollution and the role of regulation and restrictions in tackling it. In light of the crisis, this is the $ billion question. The last time such a debate was had in earnest followed the Great Depression. Evidence from then, from past crises and from other industries helps define the contours of today’s debate. This debate is still in its infancy. While it would be premature to be reaching policy conclusions, it is not too early to begin sifting the evidence. What does it suggest? Counting the systemic cost One important dimension of the debate concerns the social costs of systemic risk. Determining the scale of these social costs provides a measure of the task ahead. It helps calibrate the intervention necessary to tackle systemic risk, whether through regulation or restrictions. So how big a pollutant is banking? There is a large literature measuring the costs of past financial crises. 1 This is typically done by evaluating either the fiscal or the foregone output costs of crisis. On either measure, the costs of past financial crises appear to be large and long-lived, often in excess of 10% of pre-crisis GDP. What about the present crisis?