An Inadequate Note on Nick Bunker on Bank Leverage…

I’ve been trying to think of an intelligent comment to make on the extremely-fast-at-the-keyboard Nick Bunker’s 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:

1. They create systemic risk.
2. They are extremely powerful lobbyists–much more powerful than ten banks each one-tenth their size would be.
3. 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…