Why Not Deregulate Bank Debt Capital?

Abstract

Profit-maximizing nonbanking firms often use debt financing as a source of funds. They borrow long-term, repay the specific debt on a scheduled basis, and refinance the debt as needed. Long-term debt financing is part of the firms' overall capital structure. In making these financing decisions, financial managers analyze expected investment returns, costs and risks of alternate sources of funds, and the impact on owner wealth. In contrast to nonbanking firms, banks issued longterm debt instruments primarily during the 1930's. Facing supervisory mandates to increase long-term capital and identifying limited opportunities to sell additional stock, many banks borrowed long-term funds, especially from the Reconstruction Finance Corporation. Under these circumstances, bank debt capital reflected an aura of bank weakness, and issuing banks that survived the 1930's moved rapidly to eliminate stigmatic long-term debt from their balance sheets.