In The Bankers' New Clothes: What's Wrong with Banking and What to Do about It (2013), Admati & Hellwig recommend much higher equity requirements:
Requiring that banks’ equity be at least on the order of 20–30 percent of their total assets would make the financial system substantially safer and healthier.
In contrast, under Basel III:
Banks’ equity can still be as low as 3 percent of their total assets.
Admati & Hellwig make some persuasive arguments. However, I am wondering:
What are the costs or trade-offs of requiring banks to have higher equity?
Admati & Hellwig repeatedly claim that there are no costs or trade-offs whatsoever (see quotes below). But if so, why wouldn't they recommend even higher equity ratios like 50% or even 100%? Why stop at 20–30%?
This leads me to think that there must be costs or trade-offs which they haven't mentioned. However, I am not sure what these are and hence my question.
if banks have much more equity, the financial system will be safer, healthier, and less distorted. From society’s perspective, the benefits are large and the costs are hard to find; there are virtually no trade-offs. ...
the view that there are significant trade-offs is flawed ...
long-term benefits of much higher equity requirements are large, and the costs are hard to find. ...
Best of all, these many critical benefits of significantly higher equity requirements could be obtained at virtually no cost to society. Taxpayers would save on subsidies, and the public would benefit from a more stable and healthier financial system. There are therefore no trade-offs associated with this approach. Society would obtain large benefits for free. [Emphasis added.]