I've been trying to think of an intelligent comment to make on the extremely-fast-at-the-keyboard Taxation in the name of equity on the desirability of taxing borrowing by big banks. I strongly approve: too-big-to-fail banks are extremely bad news, I have come to believe, for three reasons:
- They create systemic risk.
- They are extremely powerful lobbyists--much more powerful than ten banks each one-tenth their size would be.
- Regulation of too-big-to-fail banks too-easily steps over the line into social-network revolving-door corruption.
For all these reasons, we want to make it hard to be a too-big-to-fail bank and profitable for managers and shareholders to split such things up--internalize these externalities!
But I find myself of divided mind on the more general Admati-Heilwig-Bunker point that banking should run with a lower debt-to-equity ratio. Equity capital is scarce in this world, and it is far from clear to me that it is best-deployed backstopping banks...