What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lack of reform, exposing them as invalid.
Admati and Hellwig argue we can have a safer and healthier banking system without sacrificing any of the benefits of the system, and at essentially no cost to society. They show that banks are as fragile as they are not because they must be, but because they want to be--and they get away with it. Whereas this situation benefits bankers, it distorts the economy and exposes the public to unnecessary risks. Weak regulation and ineffective enforcement allowed the buildup of risks that ushered in the financial crisis of 2007-2009. Much can be done to create a better system and prevent crises. Yet the lessons from the crisis have not been learned.
Admati and Hellwig seek to engage the broader public in the debate by cutting through the jargon of banking, clearing the fog of confusion, and presenting the issues in simple and accessible terms. The Bankers' New Clothes calls for ambitious reform and outlines specific and highly beneficial steps that can be taken immediately.
Anat Admati is the George G. C. Parker Professor of Finance and Economics at Stanford's Graduate School of Business. She serves on the FDIC Systemic Resolution Advisory Committee and has contributed to the Financial Times, Bloomberg News, and the New York Times. Martin Hellwig is director at the Max Planck Institute for Research on Collective Goods. He was the first chair of the Advisory Scientific Committee of the European Systemic Risk Board and the cowinner of the 2012 Max Planck Research Award for his work on financial regulation.
"Insightful . . ."--Floyd Norris, New York Times
"Crucial . . ."--Jim Surowiecki, NewYorker.com
"Ms. Admati and Mr. Hellwig, top-notch academic financial economists, do understand the complexities of banking, and they helpfully slice through the bankers' self-serving nonsense. Demolishing these fallacies is the central point of The Bankers' New Clothes."--John Cochrane, Wall Street Journal
"Professor and journalist Admati and economic researcher Hellwig argue that it is possible to have a well-balanced banking system without any cost to society; weak regulations and lax enforcement is what caused the buildup of risk unleashed in the crisis. Here, they aim to demystify banking and expand the range of voices in the debate; encouraging people to form opinions and express doubts will ensure a healthier financial system as people understand the issues and influence policy. . . . The authors push for aggressive reform by outlining specific steps that can be taken to change our banking system for the better."--Publishers Weekly
"An important book for readers interested in what has been done, and what remains to be done, when it comes to safeguarding financial institutions."--Kirkus Reviews
"This book's aim, decisively achieved, is to de-mystify the public conversation about banking so we can all understand how threadbare the industry is."--Diane Coyle, Enlightened Economist blog
"This title is a must read for management and human resource professionals within the banking industry as well as government policymakers. With its clear explanations, many examples, and analogies, the book is accessible to readers who do not have business backgrounds and who want to better understand banking."--Library Journal
Table of Contents:
1 The Emperors of Banking Have No Clothes 1
PART I Borrowing, Banking, and Risk 15
2 How Borrowing Magnifies Risk 17
3 The Dark Side of Borrowing 32
4 Is It Really "A Wonderful Life"? 46
5 Banking Dominos 60
PART II The Case for More Bank Equity 79
6 What Can Be Done? 81
7 Is Equity Expensive? 100
8 Paid to Gamble 115
9 Sweet Subsidies 129
10 Must Banks Borrow So Much? 148
PART III Moving Forward 167
11 If Not Now, When? 169
12 The Politics of Banking 192
13 Other People's Money 208