There exists a widespread view that having banks use more equity
capital (and relatively less debt) to finance the assets they
hold creates substantial costs, costs that may be so great as to
make more capital infeasible. I believe that these costs are
very substantially exaggerated. But the benefits of having banks
that are far more robust – in the sense of having a balance
sheet structure that makes them much less likely to come near to
insolvency once actual and suspected losses on their assets come
along – are likely to be large. Scepticism about costs I want to
focus on the cost side of this and briefly explain why I am
sceptical that those costs are likely to be so large. I begin
with a simple point: in many countries, banks used to finance a
very much higher part of their activities with equity than is
considered acceptable today. This was certainly the case in the
UK. Figure 1 shows a measure of assets relative to equity and
reserves for UK banks over the past 100 years or so. Between
1880 and 1960 ba