More Misinformation about Banking Regulation
James Kwak

“ The amount of bank lending is dependent on the volume of lending opportunities available to banks with a risk-adjusted interest rate that exceeds their cost of capital. Since the cost of capital doesn’t change with capital requirements (except, again, because of the tax subsidy for debt), the amount of bank lending doesn’t change either.”

Well that isn’t entirely true. If your cost of capital changes because you have a higher percentage of equity (which is true regardless of MM theory because equity holds residual claims in bankruptcy and therefore requires a higher return than debt, regardless of tax effects) then naturally you will lend to less ventures because capital regulations make it prohibitive to earn an appropriate return on equity.

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