An international debate continues to unfold in banking, corporate governance, and finance on whether the capital structure of the world's largest financial institutions is too heavily dependent on debt, too little on equity. Two of us, with coauthors, have argued elsewhere that there is no socially beneficial purpose for this overreliance on debt, and that such reliance increases the likelihood of taxpayer bailouts with their associated economic, financial, and social costs. Some academics and bankers continue to insist, however, that increased equity is costly for banks and for society. The arguments proffered in defense of these propositions contradict the most basic insights from corporate finance, and often neglect to distinguish private costs from social costs in explaining this preference for debt-heavy capital structures.
