The expected cost of failure to the economy at large should still be the key criterion for determining which financial firms are regulated and which are not, since this is what drives de facto eligibility for the official safety net, be it deposit insurance, access to the central bank’s liquidity assistance, or use of public funds for recapitalization or nationalization. Size, leverage, and the degree of “entanglement” in financial markets should all be important in making the eligibility decision—more so than how firms classify themselves (as banks, nonbanks, etc). I note that Willem Buiter takes a similar view in “Self.
