• Trend to size regardless of achievable synergy effects: The refinancing advantage created simply by size(and the resulting implicit state guarantee) leads banks to expand and merge beyond their ideal economic size. The consequence is an oligopolisation of the market with negative welfare effects. • Financial blackmail of the state and restrictions on state alternatives: Citing their vital role for the stability of the system, big banks can basically force the state to provide financial support if and when they need it. This situation where big banks profit individually from their pure size while potentially burdening society with enormous costs urgently needs remedying. At the same time, there is a certain tension here with the desirable objective of consolidating and deepening the European internal market in financial services, which inevitably means banks operating internationally. It would not be desirable to split up financial institutions ex ante because this would have the effect of renationalising the internal market. Instead it would make sense(1) to avoid misincentives by establishing regulatory measures to more adequately price in the risks of bank business and(2) to create instruments designed to ensure that large active banks no longer present a risk of financial blackmail. Various approaches are conceivable here: (1) Stronger prevention of especially risky bank activities Dealing with risk is central to the banking business. But the return must match the risk; in other words, risks must not be externalised. In a switch from current practice, high risks must be coupled with high costs as well as high potential returns. The greater risks involved in particular transactions must be reflected in higher risk costs in the form of capital adequacy requirements, liquidity cushions and risk management provisions. This is imperative if we are to prevent“casino” banking activities from endangering economically important banking functions(“utility” banking). The inherent control and incentive effect of higher risk costs reduces the taking of excessive risks. (2) Manage the complexity of big banks (A) Large, internationally active credit institutes must draw up resolution plans that allow the economically relevant banking functions to be separated out quickly and easily if need be. Supervisory authorities, politicians and central banks must make it clear that functions that are not absolutely necessary for the economy(“casino” banking) will be wound down in a controlled fashion rather than rescued, for example via special purpose entities. An orderly winding down procedure is essential in order to avoid dislocation in market pricing and counterparty positions. (B) Resolution(or wind-down) plans can be backed up by establishing a Chinese wall within large, internationally active banks. Binding equity capital allocations between“utility” banking and“casino” banking(that may be altered occasionally but on no account in a crisis) would prevent“utility” banking equity being used to make up losses from the“casino”. (C) The idea of subjecting banks that are important at the European level to a levy staggered by size needs to be considered. A levy that increases with the size of bank would internalise the market-distorting advantages that large banks enjoy on the grounds of their implicit state guarantees. This can be combined with a crisis intervention fund for large, internationally active banks(early intervention system). Such a levy would in the first place be a Pigovian management measure. 1 As its function is oriented towards systemic risk, the European Systemic Risk Board is the obvious entity to deal with such a proposal. 3