The Bankers' New Clothes: What's Wrong with Banking and What to Do about It - Updated Edition by Anat AdmatiThe Bankers' New Clothes: What's Wrong with Banking and What to Do about It - Updated Edition by Anat Admati

The Bankers' New Clothes: What's Wrong with Banking and What to Do about It - Updated Edition

byAnat Admati

Paperback | March 23, 2014

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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. Anat Admati and Martin Hellwig argue that we can have a safer and healthier banking system without sacrificing any of its benefits, and at essentially no cost to society. They 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.

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 Co...
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Title:The Bankers' New Clothes: What's Wrong with Banking and What to Do about It - Updated EditionFormat:PaperbackDimensions:424 pagesPublished:March 23, 2014Publisher:Princeton University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0691162387

ISBN - 13:9780691162386

Reviews

Rated 5 out of 5 by from A Clearly Written Prescription for What Ails Our Banks Many books have tried to explain the origins of the 2008 financial crisis, and many more have offered advice to prevent a recurrence. The Bankers’ New Clothes is the clearest prescription yet to address the central cause of the crisis: the financial system itself, and in particular modern (overleveraged) banking. An outstanding book that should be read by everyone: politicians, regulators, bankers, and those with an interest in a stable financial system (i.e. anyone with a bank account, who pays taxes, or has a job). The authors share their motivation in the preface; they had “hoped that the lessons of the crisis would be learned ... but ... were disappointed. There [has been] no serious analysis of how the financial system might be made safer.” They follow with a caution, and then their goal; “The banking system, even with proposed reforms, is as dangerous and fragile as the system that brought us the recent crisis. But this situation can change. With the right focus and a proper diagnosis of the problems, highly beneficial steps can be taken immediately.” While the motivation for the book was the recent financial crisis, the authors focus much more on the structure of financial institutions and the financial industry than they do on the recent sub-prime meltdown. In one set of examples, Admati and Hellwig link the 1980s US savings & loan debacle and the recent “rogue” traders at Barings Bank, Credit Lyonnais, and JP Morgan to the risk and oversight structure of banks, and the perverse incentives for individual and corporate risk taking - the same structural issues at the heart of the recent crisis. They also expose the repeated obfuscation of banks and lobbyists, highlight the complicity of politicians, and on occasion correct misinformation promulgated by individuals who should know better (former Federal Reserve Governor Frederic Mishkin). The authors’ explanations of how banks work, in particular leverage and capital requirements, is exceptional. They start with an example everyone will understand - a home mortgage - and link it to the gain or loss the homeowner would experience if their home rose or fell in value over the course of a year. The same methodology is then used to show how a bank would fare given a similar rise or fall in the value of its assets; gains and losses are magnified due to the bank’s leverage. An illuminating real world example is highlighted in their diagram of JP Morgan’s self-described “fortress” balance sheet. Using US (GAAP) accounting principles the very high leverage is apparent, but using European (IFRS) accounting principles the leverage is almost double again! The global regulatory response to over-leverage is set out in an agreement called Basel III, which phases in over the coming years a new global agreement on banks’ reserve requirements. The authors ridicule the effort as as wholly inadequate: too vague; too easy for banks to manipulate (what exactly are “risk-weighted assets”?); too lax (3% equity to total assets); and too slow to implement (2019 for the risk-weighted assets portion). Their prescription: issue equity immediately or stop dividend payments (i.e. preserve capital within the banks) until the capital equals 30%. Harkening back to the authors’ initial example of a home mortgage, the banking system would move from a 3% “down payment” to a 30% “down payment” margin of safety. Alarming, disheartening, and a call to action, The Bankers’ New Clothes could not be more timely or better written. Written for a general audience, the book explains issues and industry terminology very well, features outstanding examples and analogies, and concludes with specific remedies and an estimate of associated costs. As an added bonus the book features an unparalleled notes section, which at over 100 pages is a worthy read in itself. A truly outstanding effort.
Date published: 2013-03-24

Table of Contents

Preface to the Paperback Editionix
Prefacexiii
Acknowledgmentsxvii
1The Emperors of Banking Have No Clothes 1
PART I Borrowing, Banking, and Risk 15
2How Borrowing Magnifies Risk 17
3The Dark Side of Borrowing 32
4Is It Really "A Wonderful Life"? 46
5Banking Dominos 60
PART II The Case for More Bank Equity 79
6What Can Be Done? 81
7Is Equity Expensive? 100
8Paid to Gamble 115
9Sweet Subsidies 129
10Must Banks Borrow So Much? 148
PART III Moving Forward 167
11If Not Now, When? 169
12The Politics of Banking 192
13Other People's Money 208
Notes229
References337
Index363

Editorial Reviews

"I regard The Bankers' New Clothes as the most important contribution to the analysis of banking regulation in the past twenty five years. . . . This book should be required reading for bank regulators, bankers, and legislators; it should also do a lot to demystify banking for the concerned public. It is beautifully written and forcefully argued. . . . [T]his is a terrific book. It took courage, a deep understanding of banking and finance, and first-rate expository skills to write."-Morris Goldstein, Senior Fellow, Peterson Institute for International Economics, from event introduction speech on February 11, 2013