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

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Overview

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 ...

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

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Overview

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.

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Editorial Reviews

From the Publisher

"The authors have written the book for the enlightenment of the average reader who has no background in economics, finance or quantitative fields. But it can be read by anyone interested in banking--bankers, policy makers and researchers."--Business Standard

"[The Bankers' New Clothes is] a clearly written, sensible analysis of problems and cures for the U.S. banking system. . . . Admati and Hellwig take a lot of time to clearly explain the problems with depending too much on borrowed money . . ."--Dale Singer, St. Louis Post-Dispatch

"The Bankers' New Clothes is a lucid exposition of the intellectual falsehoods deployed by banks to justify the ways in which they went about growing their business beyond any reasonable assessment of risk in the run-up of the crisis of 2008 and which they continue to peddle today. Admati and Hellwig cut through the debates about whether it was too little or too much regulation that was to blame, whether central banks could and should have acted faster, and the rights and wrongs of securitisation or separating commercial and investment banking, and go to the heart of the matter."--Will Hutton, New Statesman

"[T]hought provoking . . ."--Heather Stewart, Observer

"[Admati's and Hellwig's] case that the banking industry still needs a shake-up is persuasive. And you have to admire their nerve in tackling the lobby head-on because, like the emperor in the Hans Christian Andersen fairytale, it wears a smokescreen of competence and confidence. Attacking the illusion takes courage."--David Wilson, South China Morning Post

"A clear and detailed call for banking reform. Arguing that the system is no safer today than before the financial crisis, the authors reject some bankers' and politicians' fears that further regulations would be too expensive and instead call for extensive change. Their starting place: Make banks responsible for their own mistakes."--Worth

"One of the greatest strengths of this book is that it clearly explains the issues for the ordinary reader. Financial reform shouldn't be left solely to Wall Street bankers and their captured policymakers in Washington, D.C., to decide. Regular citizens must make their voices heard, and this book will help them understand the basic terminology and concepts. I encourage everyone with an interest in effective financial reform to pick up a copy today. This just might be the most important book of 2013."--John Reeves, Motley Fool

"Offering a unique insight into banking from both an insider's and layman's perspectives, The Bankers' New Clothes is a welcome source of information in these unstable times."--Noori Passela, The National

"The Bankers' New Clothes . . . is critical and refreshing. Anat Admati and Martin Hellwig are a formidable pair and systematically demolish all the bankers' arguments on risk, capital buffers, reserve requirements and the claims that no further reforms are required."--Hazel Henderson, Seeking Alpha

"Admati and Hellwig walk banking neophytes slowly through how banking works, framing examples in a way that most people can understand: borrowing on a home. In very simple terms the authors explain how excess leverage is dangerous. Ironically, bankers are quick to point this out when examining someone else's credit prospects but not necessarily their own."--Douglas French, Freeman

"[T]he banks' argument that equity capital is expensive and that increasing equity capital would force them to pass up otherwise attractive lending opportunities has been systematically demolished, most notably by the academics Anat Admati and Martin Hellwig. In a new book they argue . . . that both the equity and debt of well capitalised banks are safer and thus cheaper, while a lower return is perfectly acceptable to investors in exchange for lower risk."--John Plender, Financial Times

"Since the 2008 financial crisis, there has been a continuing conversation on large banks and the idea of institutions that are 'too big to fail (TBTF).' Anat Admati and Martin Hellwig have provided a valuable contribution to the debate in their new book, The Bankers' New Clothes. . . . This is a timely and interesting book and one that is squarely in the middle of the debate over the future of the nation's largest banks."--Christopher Whalen, National Interest

"I've read almost all the major books on the financial crisis, and what makes this one of the best, if not the very best, is its simplicity and accessibility."--Emre Deliveli, Hurriyet Daily News

"The book pounds quite the drumbeat here: Force banks to borrow less (they should make up the difference through issuing more equity stock) and so inject sanity into the system."--Katharine Whittemore, Boston Globe

"In simple and accessible terms, the authors show convincingly that banks are as fragile and destructive as they are, not because they must be, but because they want to be--and they get away with it."--Shanghai Daily

"The Bankers' New Clothes . . . stands out from the crowd. For one, it does not beat around the bush--it is clear and straight to the point in an industry usually heaving with jargon. By using language the man on the street can understand, this bold book leads quite literally by example as it reveals insights into the banking industry and why it is in such a mess."--Nina Roehrbein, Investment & Pensions Europe

"This is the most important book to have come out of the financial crisis. It argues, convincingly, that the problem with banks is that they operate with an order of magnitude too little equity capital, relative to their assets. Targeting return on equity, without consideration of risk, allows bankers to pay themselves egregiously, while making their institutions and the economy hugely unstable."--Financial Times, "Books of the Year So Far" Summer Reading Guide

"The book deserves to be read by both bankers and policymakers as it debunks many of the myths that have been used to justify excessive leverage in banking."--Economic & Political Weekly

"This excellent volume provides an invaluable lens through which to view modern banking and the ways it has evolved to privatize returns and socialize risks. . . . Admati and Hellwig provide an accessible explanation of the inherent risks in the current banking system and propose sensible rules and reforms to make the system stable without damaging bank lending or economic growth."--Choice

"This accessible look into complex financial theory is a must-read for anyone interested in the ongoing debate over regulatory reform and 'too big to fail.'"--Jeanine Skowronski, Deputy Editor, BankThink

"[T]he Bankers' New Clothes makes a powerful case for why banks should stop borrowing so much."--Rana Foroohar, Time

"[B]uy this book; read this book; give this book to your friends; discuss this book; act on this book."--Carol Hunt, Irish Sunday Independent

"The Bankers' New Clothes makes a simple, powerful argument: that banks need to raise more capital. It is entirely persuasive that the extent of their leverage makes the financial system fragile, and it clearly and patiently demolishes all the counter-arguments made by the banks and their lobbyists."--Diane Coyle, Enlightened Economist

"The authors write well in simple language any adult who reads English can understand, and then support each chapter with exhaustive endnotes for economists and to prove they are not making anything up; the banks really are as bad as they say, and we can fix it."--Reference & Research Book News

"The Bankers' New Clothes, presents an interesting and fresh viewpoint. . . . The book's discussions about the weakness of free markets and capitalism make it highly relevant to readers of this weekly. It also sheds light on the role of government and the elites in the formation of regulatory policies."--Hemant Kanakia, Economic & Political Weekly

"In the growing literature on the 2007-08 financial crises, The Bankers' New Clothes is a significant addition. Admati and Hellwig identify low equity of banks as single most important cause of the crisis."--M. K. Datar, The Hindu

"This is a great book; I hope that it is influential."--Charles Goodhart, Economica

Publishers Weekly
Once upon a time the banking system was thriving, not a worry in sight. However, the 2007 financial crisis exposed the banks' inner workings and the risk taking that came at significant cost to the economy. 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. Part one provides an overview of how borrowing works and how it affects risk. Part two addresses the delicacy of the financial system and how its fragility can be reduced. Part three explains the possibility of transitioning to a healthier system that provides a solid system that consistently supports the economy. The authors push for aggressive reform by outlining specific steps that can be taken to change our banking system for the better; the question, is will anyone take those steps? (Mar.)
New York Times - Floyd Norris
Insightful . . .
Reuters Breakingviews - George Hay
Admati and Hellwig's analytical rigour is convincing. . . . The value of The Bankers' New Clothes is that it sets all out in clear and accessible terms over little more than 200 pages, without cutting corners.
Financial News - Richard Saunders
Increasing capital is the most sure-fire way of improving financial stability. Indeed, a new book—The Bankers' New Clothes—cogently argues that equity/debt ratios in banks could and should be increased drastically to levels more like those of ordinary businesses.
Financial World - Peter Morris
One can only hope that non-financial readers who want to improve the focus of their frustration will find their way to this book. Perhaps, then, policy-makers will start to feel pressure for smarter change.
Economist
Many readers may feel their stomachs sink at the mention of capital ratios and systemic risk. But Anat Admati, a finance professor at Stanford University, and Martin Hellwig, a director at the Max Planck Institute for Research on Collective Goods, have done an admirable job in explaining how capital in the banking system works to absorb shocks, and how too little of it makes banks unstable.
Business Standard
The authors have written the book for the enlightenment of the average reader who has no background in economics, finance or quantitative fields. But it can be read by anyone interested in banking—bankers, policy makers and researchers.
St. Louis Post-Dispatch - Dale Singer
[The Bankers' New Clothes is] a clearly written, sensible analysis of problems and cures for the U.S. banking system. . . . Admati and Hellwig take a lot of time to clearly explain the problems with depending too much on borrowed money . . .
New Statesman - Will Hutton
The Bankers' New Clothes is a lucid exposition of the intellectual falsehoods deployed by banks to justify the ways in which they went about growing their business beyond any reasonable assessment of risk in the run-up of the crisis of 2008 and which they continue to peddle today. Admati and Hellwig cut through the debates about whether it was too little or too much regulation that was to blame, whether central banks could and should have acted faster, and the rights and wrongs of securitisation or separating commercial and investment banking, and go to the heart of the matter.
Observer - Heather Stewart
[T]hought provoking . . .
South China Morning Post - David Wilson
[Admati's and Hellwig's] case that the banking industry still needs a shake-up is persuasive. And you have to admire their nerve in tackling the lobby head-on because, like the emperor in the Hans Christian Andersen fairytale, it wears a smokescreen of competence and confidence. Attacking the illusion takes courage.
Worth
A clear and detailed call for banking reform. Arguing that the system is no safer today than before the financial crisis, the authors reject some bankers' and politicians' fears that further regulations would be too expensive and instead call for extensive change. Their starting place: Make banks responsible for their own mistakes.
Motley Fool - John Reeves
One of the greatest strengths of this book is that it clearly explains the issues for the ordinary reader. Financial reform shouldn't be left solely to Wall Street bankers and their captured policymakers in Washington, D.C., to decide. Regular citizens must make their voices heard, and this book will help them understand the basic terminology and concepts. I encourage everyone with an interest in effective financial reform to pick up a copy today. This just might be the most important book of 2013.
The National - Noori Passela
Offering a unique insight into banking from both an insider's and layman's perspectives, The Bankers' New Clothes is a welcome source of information in these unstable times.
Seeking Alpha - Hazel Henderson
The Bankers' New Clothes . . . is critical and refreshing. Anat Admati and Martin Hellwig are a formidable pair and systematically demolish all the bankers' arguments on risk, capital buffers, reserve requirements and the claims that no further reforms are required.
Freeman - Douglas French
Admati and Hellwig walk banking neophytes slowly through how banking works, framing examples in a way that most people can understand: borrowing on a home. In very simple terms the authors explain how excess leverage is dangerous. Ironically, bankers are quick to point this out when examining someone else's credit prospects but not necessarily their own.
Financial Times - John Plender
[T]he banks' argument that equity capital is expensive and that increasing equity capital would force them to pass up otherwise attractive lending opportunities has been systematically demolished, most notably by the academics Anat Admati and Martin Hellwig. In a new book they argue . . . that both the equity and debt of well capitalised banks are safer and thus cheaper, while a lower return is perfectly acceptable to investors in exchange for lower risk.
National Interest - Christopher Whalen
Since the 2008 financial crisis, there has been a continuing conversation on large banks and the idea of institutions that are 'too big to fail (TBTF).' Anat Admati and Martin Hellwig have provided a valuable contribution to the debate in their new book, The Bankers' New Clothes. . . . This is a timely and interesting book and one that is squarely in the middle of the debate over the future of the nation's largest banks.
Hurriyet Daily News - Emre Deliveli
I've read almost all the major books on the financial crisis, and what makes this one of the best, if not the very best, is its simplicity and accessibility.
Boston Globe - Katharine Whittemore
The book pounds quite the drumbeat here: Force banks to borrow less (they should make up the difference through issuing more equity stock) and so inject sanity into the system.
Shanghai Daily
In simple and accessible terms, the authors show convincingly that banks are as fragile and destructive as they are, not because they must be, but because they want to be—and they get away with it.
Investment & Pensions Europe - Nina Roehrbein
The Bankers' New Clothes . . . stands out from the crowd. For one, it does not beat around the bush—it is clear and straight to the point in an industry usually heaving with jargon. By using language the man on the street can understand, this bold book leads quite literally by example as it reveals insights into the banking industry and why it is in such a mess.
Enlightened Economist blog - Diane Coyle
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.
NewYorker.com - Jim Surowiecki
Crucial . . .
Economist.com's Free Exchange
[P]owerful. . . . The authors persuasively argue that the solution is higher levels of equity capital throughout the banking industry to offset the impact of the implied government protections against failure.
FinancialTimes.com's Alphaville blog - Izabella Kaminska
Ms. Anat 'gets' banking, and gets it better than most. The fact that she is ruffling feather relates more to the fact that she is questioning deeply held—yet hardly ever challenged—belief systems within the industry, than any lack of understanding.
Wall Street Journal - John Cochrane
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.
Bloomberg Businessweek - Brendan Greeley
Admati and Hellwig have done something extraordinary. They took [banking] frustration and all its complex details and gave it a simple narrative, one that both explains what banks have been getting away with and what we might ask that Congress do about it.
Barron's - Thomas G. Donlan
Admati and Hellwig offer a simple prescription for this complex world . . .
Bloomberg News - Susan Antilla
Anat Admati and Martin Hellwig are academics with a gift for taking the mind-numbing minutiae of banking and presenting it in a way that the average reader can understand. One by one, the self-serving protests of the banking industry against tougher regulations are lined up and struck down in The Bankers' New Clothes. . . . The authors map out the regulatory flaws that make it easy for debt-junkie bankers to get rich when times are good, and leave them hanging around protesting when times are worse thanks to their own recklessness.
Huffington Post - John R. Talbott
Admati and Hellwig explain, in layman's terms, some of the silly arguments bankers make for keeping to the status quo and preventing any new regulation of the banks from ever being enacted. And they do a great job. . . . Admati and Hellwig have made a gift to you. You don't have to go wrestle with banks' financial statements or their annual reports or their 10Q's. You don't need to pull out your old accounting textbooks or call your college economics teacher to have her explain to you again why debt leverage increases risk. Admati and Hellwig have done all the hard work for you. But, you have to read their book.
Bloomberg Businessweek - Peter Coy
The Bankers' New Clothes is wowing critics of fragile banks with a simple and attractive message: Force banks to have much thicker cushions of capital and you can make them safer without paying any cost in terms of higher interest rates, less lending, or lower economic growth.
Finance & Development
Financial regulation has become a hot topic in the wake of the recent crisis; many complex proposals have ensued, and a dizzying array of new acronyms and agencies has emerged. But in their new book, Admati and Hellwig make a forceful case for a classic and simple solution to excessive, unregulated lending: higher capital ratios for banks.
Slate.com - Matthew Yglesias
An excellent new book . . .
MotherJones.com - Kevin Drum

Maybe regulators will finally listen to Admati and Hellwig after the next financial crisis.
Time.com - Christopher Matthews
[A]n important new book called The Bankers' New Clothes . . . offers what the Dodd-Frank legislation mostly lacked: a simple and elegant solution to the problem of financial stability. They argue that banks should fund themselves with more equity and less debt—or, to put it bluntly, that banks should risk more of their own money, and less of everyone else's.
WashingtonPost.com - Neil Irwin

[I]n a new book explaining what really happened at Bretton Woods, Benn Steil shows that what happened in the mountains of New Hampshire that summer is not quite the story we have been told.
Roll Call - Randolph Walerius
Admati and Hellwig don't just criticize bankers. The real strength of their book is that they walk their readers through the balance sheet and to a regulatory answer to the banking problem, an answer that's elegant in its simplicity and far-reaching in its potential to prevent and manage financial crises.
Financial Times - Martin Wolf
The most important [book] to emerge from the crisis. . . . The authors achieve three things. First, they explain basic financial theory with simple examples that any moderately numerate individual can understand. Second, they show that these basic ideas apply, with modest differences, also to banking. Finally, they prove that, in opposing them, bankers and their apologists have spun intellectual raiment as invisible as the emperor's new clothes. . . . Read this book. You will then understand the economics. Once you have done so, you will also appreciate that we have failed to remove the causes of the crisis. Further such crises will come.
NickDunbar.net - Nick Dunbar
The Bankers' New Clothes (Princeton University Press) is a book that lays out the problems in banking revealed by the crisis and asks how to solve them. The authors, Anat Admati and Martin Hellwig draw upon accounts of the crisis and come up with some clear prescriptions based on what they see as the biggest problem—that banks are over-leveraged.
Library Journal
Recent worldwide banking crises have forced governments to bail out and subsidize large banks because of what Admati (economics, Stanford Graduate Sch. of Business) characterizes as an ill-informed public perception that the institutions were too big to fail. Other misconceptions about the banking industry are addressed here as well, especially the false assumption that there is a tradeoff between banks' capital requirements and growth and profit. This book takes readers inside the global banking industry, examines the intricacies of banking operations, and addresses the major problems, including the banking system's overall "fragility." Macro solutions are offered that, the author maintains, will make the infrastructure more stable. Especially interesting is the discussion of how the current system rewards rather than penalizes risky decision making by individual bankers. VERDICT 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.—Caroline Geck, Camden Street Sch. Lib., Newark, NJ
Kirkus Reviews
How to rebuild the banking system on a safe foundation and ensure it stays there. Admati (Finance and Economics/Stanford Graduate School of Business) and Hellwig (Director/Max Planck Institute for Collective Goods), authorities in the fields of financial and capital regulation, aim "to demystify banking and explain the issues to widen the participants in the debate." They accomplish the first objective by demolishing the arguments made by the representatives of the banking business against various regulatory reforms that have been proposed since the financial crisis of 2008. They show how banks seek to maintain their status as short-term, leveraged borrowers by obfuscating the meaning of words like "capital" and "capital requirements" and insisting, as the former head of Deutsche Bank Josef Ackermann did, that "higher equity requirements…reduces growth and has negative effects for all." Relying on equity as opposed to leverage, write the authors, was a well-established banking practice in the past and does not affect economic growth. They show that banks can build equity by re-investing profit rather than distributing gains to shareholders. As for the promised explanation of "the issues," they elucidate the subsidy that tax payers provide to banks directly, through deposit insurance, and indirectly, through the assumption of forthcoming bailouts. They also clarify the distinction between liquidity crises and solvency crises and assess the risk levels still tolerated and remaining within the financial system. They insist that "concerns about hidden insolvencies have still not been addressed." An important book for readers interested in what has been done, and what remains to be done, when it comes to safeguarding financial institutions.
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Product Details

  • ISBN-13: 9780691162386
  • Publisher: Princeton University Press
  • Publication date: 3/23/2014
  • Edition description: With a new preface by the authors
  • Pages: 424
  • Sales rank: 94,221
  • Product dimensions: 5.40 (w) x 8.30 (h) x 1.20 (d)

Meet the Author


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.
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Table of Contents

Preface to the Paperback Edition ix
Preface xiii
Acknowledgments xvii
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
Notes 229
References 337
Index 363

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  • Anonymous

    Posted May 26, 2013

    I really enjoyed The Bankers' New Clothes.  I am a professional

    I really enjoyed The Bankers' New Clothes.  I am a professional stock portfolio manager, and had an informed opinion on how banks interact with financial markets, governments, and the public.  However, Admati and Hellwig's book deepened my understanding in an intelligent and well-written manner such that my appreciation for the abuses of our banking system is much improved as a result of having read their book.  The authors clearly were compelled to bring to the light of day the issues with our modern banking system and with the governmental regulatory bodies that "oversee" it.
    The book begins with a basic understand of the dynamics of debt as it pertains to capital structures (using the example of a home mortgage).  From this easy-to-understand base, we go through how high debt leverage and contagion caused the recent financial crisis, and how tax payers bailed out the banking system.  That the pre-crisis system has been saved and perpetuated by bailouts is a huge public disservice, and Admati and Hellwig explain why.  We learn about the symbiosis between bankers and politicians, and we learn the nuances that had set things up for disaster and that continue to do so.
    The authors offer a common sense solution, albeit one that the financial system and politicians will fight against to the end of days.  However, ultimately we should arrive at their prescription.  We continue to have a super-fragile banking system, and the recent crisis did not lead to the revolution it should have.  Perhaps with one more crisis the next generation will move us forward.  
    Kudos to Admati and Hellwig.  They've done a huge public service by writing this enjoyable book.  It's one of the best economics books I've read, and it should be more widely read and understood than it likely will be.  I encourage you to read it, not to mention to send a copy to your congressman.  I can't say enough for Admati and Hellwig here.

    3 out of 3 people found this review helpful.

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