Surely this is an equilibrating mechanism where depositors' interests are protected by shareholder and management incentives to preserve the bank? Those who advocate a return to free banking would argue so. And did not Modigliani and Miller show nearly 50 years ago that debt/equity ratios do not influence the value of the firm?
Well at least in frictionless markets with complete information and no taxes. Let us set aside the traditional argument in favour of bank regulation – that banks are opaque, depositors need agents to monitor the bank on their behalf, and regulators can do this cost effectively. Let us set aside the strongest argument for regulation – the prospect of contagion.