Can a bank have too much capital? To the person in the street, the answer is obvious. The function of a bank is to seek out profitable investment and lending opportunities. The more capital it has to hand, the more successful it will be.

To a professor of finance, the answer is also obvious. The professor will refer to the Modigliani-Miller theorem, which states that the value of a business is independent of its capital structure. It follows that a bank cannot add value for shareholders by altering the proportions of debt and equity in its balance sheet.