But it might encourage banks, particularly those which are currently only just managing to meet the Basel III requirements, to increase their capital beyond these requirements. One of the reasons why the banking industry usually objects to higher capital ratios is that equity is considered to be costlier than debt.
There are good reasons why shareholders are better remunerated than creditors: equity is riskier than debt because debt is senior to equity and not performance-related. Moreover, equity allows shareholders to have more of a say in a company’s business activities. The cost advantage of debt over equity, however, is also explained by differences in the tax treatment of various forms of investment.