"In a scheme analogous to the hierarchy controlling the availability of pharmaceuticals, the safest securities would, like non-prescription medicines, be available for purchase by everyone," the BIS, which is called the central bankers' central bank, said in its annual report.

"Next would be financial instruments available only to those with an authorisation, like prescription drugs; another level down would be securities available only in limited amounts to pre-screened individuals and institutions, like drugs in experimental trials," the BIS said.

"Finally, at the lowest level would be securities that are deemed illegal."

Governor King said in an address to businessmen in Edinburgh, in an echo of Churchill: “Never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”

King said it's hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk.

"That is what economists mean by 'moral hazard,'" he said. "The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The 'too important to fail' problem is too important to ignore."

He said there are only two ways in which the problem can - - in logic - - be solved. One is to accept that some institutions are “too important to fail” and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low. The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society. Any solution must fall into one of those two categories.

King said one way of dealing with this problem is to require banks to take out insurance in the form of “contingent capital,” that is capital in a form that automatically converts to common equity upon the trigger of a threshold that kicks in before a bank becomes insolvent.

He said it's worth a try. But it has three drawbacks. First, banks still have an incentive to take really big risks because the government would provide some back-stop catastrophe insurance. Second, experience has shown that it is difficult to assess risks of infrequent but high-impact events, and so it is dangerous to allow activities characterised by such risks to contaminate the essential - -  or utility - - services that the banking sector provides to the wider economy. Both of these drawbacks mean that it is almost impossible to calculate how much contingent capital would be appropriate. And a third drawback is that the approach probably requires the extension of detailed regulation

The governor said the second approach rejects the idea that some institutions should be allowed to become “too important to fail.” Instead of asking who should perform what regulation, it asks why we regulate banks. It draws a clear distinction between different activities that banks undertake. The banking system provides two crucial services to the rest of the economy: providing companies and households a ready means by which they can make payments for goods and services and intermediating flows of savings to finance investment. Those are the utility aspects of banking where we all have a common interest in ensuring continuity of service. And for this reason they are quite different in nature from some of the riskier financial activities that banks undertake, such as proprietary trading.

"The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question," King said. "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion."

The UK Treasury has proposed for banks to plan in advance a scenario on how to deal with their collapse, called “living wills.”

Some analysts expect the enactment of proposals for tighter capital regulations on risky banking operations, will force banks to separate them from their core businesses, which would in efefct meet the Trichet/King objectives.