Many bankers insist that more equity on bank balance sheets would crimp their ability to lend. Sure, they will impose rigorous covenants on nonfinancial corporate borrowers that operate with less than 40 percent equity, but 13 percent for the banks’ own looks more than ample to JPMorgan Chase chairman Jamie Dimon. Of the extra cushion, he says, “this is capital that we don’t need.”

Nonsense, says Anat Admati, the George G.C. Parker professor of finance and economics at Stanford University. Who are bankers kidding? It is high leverage, flawed regulation and compensation structures in banking — not more equity — that curtails lending capacity.

Admati is a co-author of “Debt Overhang and Capital Regulation” with Stanford University colleagues Peter DeMarzo and Paul Pfleiderer and Martin Hellwig from the Max Planck Institute in Bonn, Germany. They published the research paper in March, a sequel to earlier research. Their recent conclusion: “High equity requirements for banks bring about large benefits at essentially no relevant social cost. Banks funded with much more equity would be able to serve the economy better, without subjecting it to excessive risks and costs.”

Institutional Investor contributor Steven Mintz spoke recently with Professor Admati about the case for more equity on bank balance sheets.

What persuades you and your co-authors that higher equity requirements would be so beneficial?

Three key reasons. One, better capitalized banks can absorb losses without creating system-wide financial instability. Second, banks with more equity are less burdened by debt overhang so they can raise funds more easily for new loans. And three, higher equity requirements might give pause to banks before they embark on riskier investments that fueled the financial crisis. In addition to requiring too little equity, flawed current regulations use a system of risk weights to specify the equity requirements. The risk tier weighting system favors marketable securities and other structured investment and derivatives over lending to productive companies in the real economy that can help the economy grow.

What about market consequences if banks must add equity to their balance sheets?

It sounds counterintuitive. Shareholders and managers of highly leveraged banks, those whose investments are concentrated in the banks, resist leverage reduction even if the bank’s total value might increase. High leverage works for bankers whose bonuses are pegged to return on equity, but not for the rest of us. Reducing leverage benefits existing creditors and taxpayers who ultimately guarantee the debt. When high leverage rewards bank managers but exposes third parties to risk, or externalities, you get social inefficiencies. That’s because most shareholders own bank stocks in diversified portfolios and they pay taxes. If undercapitalized banks trigger another financial crisis, the vast majority of shareholders are likely net losers.