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The Bankers’ New Clothes
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The Bankers’ New Clothes

What’s Wrong with Banking and What to Do About It

Anat Admati and Martin Hellwig
Princeton UP, 2013
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8

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Bankers today have persuaded regulators, politicians and themselves that they need entire wardrobes of bailouts, subsidies and debt. Otherwise, they caution, the entire economy could be in peril. Professor of finance and economics Anat Admati and economist Martin Hellwig shred the fabric of bankers’ arguments. They explain in everyday language and with simple examples – which are, at times, repetitive – the contradictions and errors that keep society on the hook for banks’ excessive risk taking. getAbstract recommends their fresh take on the too-big-to-fail problem to executives, bankers and policy makers searching for the naked truth. And if the banking emperors insist they have new post-bailout clothes on, just tell them what you really see: the same old trappings that exposed them to trouble in the first place.

Summary

Made from Whole Cloth

Since the 2008 financial panic, bankers have lobbied lawmakers and the public against serious reform of the taxpayer-rescued and once-again profitable financial industry. They blame the crisis on a “fluke” – a one-off occurrence – and advocate against stricter regulations that would, according to them, have “unintended consequences,” like stalled economic growth and increased consumer costs. The bankers threaten to curb lending if Congress sets new rules that would force them to borrow less and increase capital. They predict economic ruin if regulators impose measures to ensure financial stability.

Bank executives claim that banking differs from every other industry, and that’s true: Banks finance more than 90% of their assets through debt. Other industries generally borrow less than 50%. Corporations bolster their equity by retaining earnings and issuing shares. Banks avoid expensive equity markets and rely on cheaper debt. They realize this bargain because creditors know that large financial institutions that are seen as too big to fail will get government help in bad times. Banks may save by borrowing, but taxpayers ultimately pay the bill ...

About the Authors

Anat Admati is a professor of finance and economics at Stanford University. Martin Hellwig is director of the Max Planck Institute for Research on Collective Goods.

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