The greater soundness of financial institutions’ balance sheets and capital would likely promote greater risk-taking behavior, and thus, more active investment and lending domestically as well as abroad. This channel is likely to initially exert stronger downward pressure on nominal long-term interest rates, but as the rate of inflation begins to pick up, these interest rates are expected to rise gradually.
But to mobilise equity capital from outside sources, the existing proprietor or proprietors must be prepared to share ownership of the firm with new, probably minority shareholders. For their part, new investors will only purchase equity in a firm if they are confident that they will, as non-controlling shareholders, be treated equitably by those who control the firm.