After the financial crisis of 2008, regulators in many countries moved to raise the capital requirements imposed on banks — the proportion of a bank's assets that must be funded by equity rather than by borrowed money. The rationale is straightforward: a bank financed with more equity has a larger cushion to absorb losses before it becomes insolvent, and so is less likely to fail or to require a taxpayer rescue when loans sour. Proponents of higher requirements thus present them primarily as a measure to enhance the stability of the financial system as a whole.

The banking industry has resisted, advancing a cost-of-credit argument. Banks contend that equity is a more expensive form of financing than debt, and that being compelled to hold more of it raises their overall funding costs. To preserve profitability, they argue, they will pass these higher costs on by charging more for loans or by lending less, with the result that households and businesses in the real economy face tighter, costlier credit. On this view, the gain in safety is purchased at the price of slower economic growth.

Some economists challenge the premise of the industry's argument. They invoke a principle holding that, in idealized conditions, a firm's total cost of financing does not depend on how it is split between debt and equity, because investors adjust the returns they demand as the firm's risk profile changes. If a bank funded with more equity is genuinely safer, these economists contend, both its creditors and its shareholders should accept lower returns, partially offsetting the higher cost the industry attributes to equity. They acknowledge, however, that real-world frictions — notably the tax deductibility of interest payments, which makes debt artificially cheap — may keep some of that cost difference in place.