Following the Opinion—Leader Forum on TBTF co-hosted Tuesday by FedFin and the American Banker, I sat down with one of the most ardent supporters of Brown-Vitter to continue what diplomats call a “free and frank exchange” – conventional communiqué talk when no one agrees on much of anything, but doesn’t throw any food. I was, though, tempted to hurl a breadstick or two when I was told that banks are not different than, Say, Apple and Wal-Mart and, thus, conventional corporate-finance theory applies to banks just as it does to all investors. I think not for two reasons that seem like irrefutable common sense: first, banks are financial intermediaries and as a result functionally different from non-banks; and, even if they’re the same, the rules for sure aren’t. These rules fundamentally change the business model. Each of you knows this, but apparently others who count a lot in the TBTF still don’t.

What’s the rationale behind arguments that banks and non-banks are one and the same for purposes of setting equity-capital ratios? Thinking here starts from a reasonable enough premise: loans and other bank holdings are investments, it’s less risky to invest with lots of your own money at stake and, therefore, the more equity capital, the safer the investor. But, this line of reasoning falls apart at once as soon as one takes into account that banks can’t play just with their own money and are put in business to function principally as intermediaries. If the only funds they have are those given to them by equity investors, then banks are essentially PEs or, if chastened by a bit more prudent, akin to pension funds. They perhaps could be “narrow banks” – an idea that comes and goes under which banks must back each loan with dollar-for-dollar capital. But, the reason the narrow-bank idea goes every time it comes is that no bank so incarcerated could make a nickel for its investors and still be safe and – vital – sound not just from a prudential, but also investor point of view.

Loans are superficially the same as other investments – conventional corporate-finance theory puts them both on the same side of the ledger as “assets.” But, banks function as intermediaries because they put other people’s money to work to make loans that cost a lot less to the borrower because, instead of being funded with ruthless capital from private investors, loans from banks are funded by deposits and other sources comforted by various rules and, if all else fails, several critical government safety nets. These lower-cost funds permit banks to profit not just from return on investment – the sole driver of most sources of private capital – but rather as financial intermediaries from net interest margin (NIM). Playing the NIM spread, not ROI hopes, is what makes banks banks.

As I said, at least I think so. At lunch, I was told in very authoritative terms that banks can still be banks and operate under the same corporate-finance model as companies in any number of other business lines. At one point, I vainly suggested that I would concede the point if my interlocutor would recognize all the rules that differentiate banks from non-banks and allow them all to be repealed in favor of a simple, punitive leverage standard. This would, I said, surely level the proverbial playing field, allowing those who want very high capital to have their way and banks to go scot-free to romp in their ROI like anyone else. All of a sudden, I heard, banks are essential to credit formation and, so, can’t be let free.

I’m not sure I have the energy to do this all over again, but I’m afraid the largest banks will have to. As was also clear at our Opinion-Leader Forum, those on the other side on TBTF aren’t buying much said so far by big banks. Part of this, I think, is not so much that the various analyses differ, but rather that the fundamental premises on which each side takes it stand are so diametrically and, at least so far, irreconcilably different. Maybe the best place to start on TBTF is the basics.