Bank policymakers struggle to increase oversight without stifling innovation

These days that tag looks out of date. As global policymakers thrash around ahead of the forthcoming G20 summit, trying to work out how to fix a deeply flawed financial system, size is no longer their only headache.

The crucial issue now dogging men such as Jean-Claude Trichet, president of the European Central Bank, who yesterday outlined his plans for reforming financial regulation, or Timothy Geithner, US Treasury secretary, is the question of institutions that are too “interconnected” to fail.

The past decade of frenetic financial innovation and globalisation has created a western banking system where numerous entities are entwined in some unpredictable and near-indefinable ways. Just think of the chain reactions unleashed by Lehman Brothers' collapse.

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