Overheads come partially from scale – there is a school of thought saying that banks have become too big because of implied regulation. In this case, it is the implied regulation we need to look at rather than the size and overheads themselves 😉

The equity issue is an interesting one, the two key areas of interest seem to be:

1) Tell banks to hold more equity (this is part of the driver of CAR’s ratio)
2) Convert bondholders into equity holders in the case of failure, implying that some of the risk equity holders bear goes onto bondholders.

If the idea is that debt is prefered to equity due to the fact that debt is costlessly insured, then I’d suggest making this insurance costly. The design of such a scheme, and making sure it takes into account whatever the incentives are given current regulation, is pretty important though.

I don’t think the goal is to remove the chance of anything ever failing, it is about really just making sure we are clear on costs and benefits … and that policy in the US banking system doesn’t seem to have been appropriately trading those off.

#2 The hurdle rates on new activity in banks seems to be very high. I think this may be something to do with the very high leverage. At any rate, I think this hurdle actually dissuaded some investment in lower risk activities.

#3 One of the things that deserves more discussion is how to persuade a bank to increase its amount of equity. They don’t like doing it, and I’m not sure how it’s been done in the past, other than waiting for the bank to go to the wall and then having Treasury subscribe for stock.

#4 Matthew C Klein at the Economist has done some great posts on banking recently.