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The Bankers' New Clothes: What's Wrong with Banking and What to Do about It - Updated Edition
Why our banking system is broken—and what we must do to fix itAs memories of the Global Financial Crisis have faded, it has been tempting to believe that the banking system is now safe and that we will never again have to choose between havoc and massive bailouts. But The Bankers’ New Clothes shows that reforms have changed little—and that the banks still present serious dangers to the world economy. Writing in clear language anyone can understand, Anat Admati and Martin Hellwig explain how we can have a healthier banking system without sacrificing any benefits. They also debunk the false and misleading narratives of bankers, regulators, politicians, academics, and others who oppose real reform.
412 pages, Kindle Edition
First published January 1, 2013
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July 12, 2013
By George Hay
How much capital do banks need? Ask the Basel Committee of global banking supervisors, and it will recommend 3 percent of total bank assets. Ask tougher observers like the UK’s banking commission, and you’ll hear 4 percent. But ask Anat Admati and Martin Hellwig, the economists behind "The Bankers’ New Clothes", and you’re in for a shock: they’re after 30 percent.
Bankers greet this kind of talk with a bemused shake of the head. Hiking capital, they claim, will just mean cutting the amount of lending in the economy by a proportionate amount. Super-high capital ratios would slash returns on equity to such an extent that banks would struggle to attract new private-sector investors to help increase lending. Ask anyone in the City and they will repeat, as if in a trance, that equity is expensive and pushes up the cost of providing credit.
Admati and Hellwig tackle this argument head on. First, they argue that the idea of capital and lending being in opposition is baloney: capital - which should really be called “equity” to avoid confusion - is in the liability column of banks’ balance sheets. It helps to fund assets - or loans - rather than sitting unused in a box. Banks with more equity can do more lending, not less.
The authors concede that banks’ ROE figures would fall if they had more equity. But any bank maintaining a 30 percent capital ratio will be significantly safer, which means that the cost of that equity should also come down. This is the “Modigliani-Miller” theorem, which states that in an idealised world companies would be indifferent between funding themselves with debt or equity. More loss-absorbing capital should also make it less likely that taxpayers will have to bail banks out.
Admati and Hellwig’s analytical rigour is convincing. So why aren’t banks voluntarily increasing the amount of equity on their balance sheets? The cynical view is that bankers have an incentive to keep capital levels low - less capital means higher returns on equity, and bigger bonuses. They spend plenty of money trying to convince politicians and the general public that equity is expensive. The authors marshal plenty of examples, reminiscent of Charles Ferguson’s depressingly plausible 2011 film Inside Job, documenting how politicians, regulators and bankers are intertwined.
But the argument for dramatic increases in equity faces a more fundamental problem. Banks are not necessarily subject to the normal dynamic, whereby debt becomes more costly as banks become more leveraged - and therefore more risky. Instead, taxpayer subsidies that mean big banks are bailed out in a crisis give them an incentive to borrow as much as possible. In the authors’ own analogy, banks are like homebuyers who put down tiny deposits on their houses but know they will get rescued by a rich auntie if anything goes wrong.
The problem for Admati and Hellwig is that this means bankers’ objections have some logic. Adding more equity reduces the proportion of their loans that can be financed with artificially cheap debt. That’s bad for bonuses and shareholders, but also for small businesses and families striving to get onto the housing ladder: their borrowing costs may go up.
There’s something rotten about this status quo, though. Even if the system enables cheaper loans, it also means bank shareholders and employees are protected from facing the consequences of their risky behaviour: taxpayers - the rich aunties - are on the hook. When bankers dismiss higher equity levels they are cynically and opportunistically confusing their private gains with what’s good for society. They are like a chemical firm carping about the cost of insuring against potential losses from toxic spillages it has itself caused.
The value of "The Bankers’ New Clothes" is that it sets all this out in clear and accessible terms over little more than 200 pages, without cutting corners: the notes alone are over half as long. The problem is how to get the banking firmament from where it is now to where Admati and Hellwig think it needs to be. The authors’ preference - bans on dividends to shareholders and forcible state restructurings of weaker banks - would require politicians willing to not only take on Wall Street but also explain why cheap financing shouldn’t be extended to the poor and why potentially more taxpayer money needs to go into the financial sector. The authors’ hard line on capital means they also underplay regulatory reforms that are already under way: supervisors have made some progress in safely winding up failing institutions, and while new Basel III rules may have only trebled capital requirements from a wholly inadequate starting point, they are better than nothing.
That doesn’t mean Admati and Hellwig are any less right in their analysis of banks’ failings. But the sad truth is that when confronted with a choice between a freestanding banking system and one which periodically blows up but enables artificially low borrowing rates, politicians will tend to choose the latter. That means low bank equity - and overpaid bankers - could be around for a while yet.
How much capital do banks need? Ask the Basel Committee of global banking supervisors, and it will recommend 3 percent of total bank assets. Ask tougher observers like the UK’s banking commission, and you’ll hear 4 percent. But ask Anat Admati and Martin Hellwig, the economists behind "The Bankers’ New Clothes", and you’re in for a shock: they’re after 30 percent.
Bankers greet this kind of talk with a bemused shake of the head. Hiking capital, they claim, will just mean cutting the amount of lending in the economy by a proportionate amount. Super-high capital ratios would slash returns on equity to such an extent that banks would struggle to attract new private-sector investors to help increase lending. Ask anyone in the City and they will repeat, as if in a trance, that equity is expensive and pushes up the cost of providing credit.
Admati and Hellwig tackle this argument head on. First, they argue that the idea of capital and lending being in opposition is baloney: capital - which should really be called “equity” to avoid confusion - is in the liability column of banks’ balance sheets. It helps to fund assets - or loans - rather than sitting unused in a box. Banks with more equity can do more lending, not less.
The authors concede that banks’ ROE figures would fall if they had more equity. But any bank maintaining a 30 percent capital ratio will be significantly safer, which means that the cost of that equity should also come down. This is the “Modigliani-Miller” theorem, which states that in an idealised world companies would be indifferent between funding themselves with debt or equity. More loss-absorbing capital should also make it less likely that taxpayers will have to bail banks out.
Admati and Hellwig’s analytical rigour is convincing. So why aren’t banks voluntarily increasing the amount of equity on their balance sheets? The cynical view is that bankers have an incentive to keep capital levels low - less capital means higher returns on equity, and bigger bonuses. They spend plenty of money trying to convince politicians and the general public that equity is expensive. The authors marshal plenty of examples, reminiscent of Charles Ferguson’s depressingly plausible 2011 film Inside Job, documenting how politicians, regulators and bankers are intertwined.
But the argument for dramatic increases in equity faces a more fundamental problem. Banks are not necessarily subject to the normal dynamic, whereby debt becomes more costly as banks become more leveraged - and therefore more risky. Instead, taxpayer subsidies that mean big banks are bailed out in a crisis give them an incentive to borrow as much as possible. In the authors’ own analogy, banks are like homebuyers who put down tiny deposits on their houses but know they will get rescued by a rich auntie if anything goes wrong.
The problem for Admati and Hellwig is that this means bankers’ objections have some logic. Adding more equity reduces the proportion of their loans that can be financed with artificially cheap debt. That’s bad for bonuses and shareholders, but also for small businesses and families striving to get onto the housing ladder: their borrowing costs may go up.
There’s something rotten about this status quo, though. Even if the system enables cheaper loans, it also means bank shareholders and employees are protected from facing the consequences of their risky behaviour: taxpayers - the rich aunties - are on the hook. When bankers dismiss higher equity levels they are cynically and opportunistically confusing their private gains with what’s good for society. They are like a chemical firm carping about the cost of insuring against potential losses from toxic spillages it has itself caused.
The value of "The Bankers’ New Clothes" is that it sets all this out in clear and accessible terms over little more than 200 pages, without cutting corners: the notes alone are over half as long. The problem is how to get the banking firmament from where it is now to where Admati and Hellwig think it needs to be. The authors’ preference - bans on dividends to shareholders and forcible state restructurings of weaker banks - would require politicians willing to not only take on Wall Street but also explain why cheap financing shouldn’t be extended to the poor and why potentially more taxpayer money needs to go into the financial sector. The authors’ hard line on capital means they also underplay regulatory reforms that are already under way: supervisors have made some progress in safely winding up failing institutions, and while new Basel III rules may have only trebled capital requirements from a wholly inadequate starting point, they are better than nothing.
That doesn’t mean Admati and Hellwig are any less right in their analysis of banks’ failings. But the sad truth is that when confronted with a choice between a freestanding banking system and one which periodically blows up but enables artificially low borrowing rates, politicians will tend to choose the latter. That means low bank equity - and overpaid bankers - could be around for a while yet.
March 23, 2013
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.
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.
September 5, 2014
เป็นหนังสือเกี่ยวกับระบบธนาคารที่อ่านง่ายที่สุดในบรรดาหนังสือทั้งหมดที่เคยอ่านในชีวิต ผู้เขียนทั้งสองคือ ดร.แอดมาที กับ ดร.เฮลวิก อธิบายว่าพยายามเขียนให้คนทั่วไปเข้าใจ เพราะอยากให้ประชาชนตื่นตัวว่าระบบการกำกับธนาคารยังไม่ได้ถูกปฏิรูปในทางที่จะลดความเสี่ยงของวิกฤตเศรษฐกิจครั้งใหม่ได้อย่างแท้จริง และสาเหตุที่ยังไม่คืบหน้าก็คือ ธนาคารต่างๆ เองพยายามเผยแพร่ "มายาคติ" หลายข้อเพื่อกีดกันการปฏิรูปกฎหมาย มายาคติซึ่งไม่เป็นความจริงและทำให้คนเข้าใจผิด
สนุกและเต็มไปด้วยตัวอย่าง อุปมาอุปไมย ฯลฯ มากมาย ใครไม่สนใจการทำงานของธนาคารอาจไม่ชอบ แต่ทุกคนที่อยากรู้ว่าธนาคารทำงานอย่างไรน่าจะ "ต้องอ่าน" หนังสือที่ขึ้นชั้น "คลาสสิก" ไปแล้วอย่างไม่ต้องสงสัย
เคยเขียนสรุปเนื้อหาหลักๆ ของหนังสือ บนเว็บไทยพับลิก้าไปสองตอน --
ถอดรื้อมายาคติที่ไม่ยั่งยืน : บทเรียนจาก “เสื้อใหม่ของนายธนาคาร” (1)
http://thaipublica.org/2014/08/banker...
ถอดรื้อมายาคติที่ไม่ยั่งยืน : บทเรียนจาก “เสื้อใหม่ของนายธนาคาร” (2)
http://thaipublica.org/2014/09/banker...
สนุกและเต็มไปด้วยตัวอย่าง อุปมาอุปไมย ฯลฯ มากมาย ใครไม่สนใจการทำงานของธนาคารอาจไม่ชอบ แต่ทุกคนที่อยากรู้ว่าธนาคารทำงานอย่างไรน่าจะ "ต้องอ่าน" หนังสือที่ขึ้นชั้น "คลาสสิก" ไปแล้วอย่างไม่ต้องสงสัย
เคยเขียนสรุปเนื้อหาหลักๆ ของหนังสือ บนเว็บไทยพับลิก้าไปสองตอน --
ถอดรื้อมายาคติที่ไม่ยั่งยืน : บทเรียนจาก “เสื้อใหม่ของนายธนาคาร” (1)
http://thaipublica.org/2014/08/banker...
ถอดรื้อมายาคติที่ไม่ยั่งยืน : บทเรียนจาก “เสื้อใหม่ของนายธนาคาร” (2)
http://thaipublica.org/2014/09/banker...
February 15, 2016
This book drives home one simple idea again and again for over two hundred pages -- the banking system would be safer if minimum equity requirements of banks were to be increased. They reject other proposed solutions to the current fragility of the banking system as being too complex or too easily evaded and reject a variety of arguments that have been put forth as to why an increase in equity requirements would be hard to achieve or better put off to a later time or would have negative effects on the banking system. They show how the explicit subsidy of deposit insurance and the implicit subsidy of the willingness to rescue banks that are "too big to fail" adds to the problem by giving banks incentives to load on as much debt as possible at the expense of equity.
This book hugely oversimplifies the problems that the banking system faces, but that is not necessarily a bad thing, because sometimes complexity obscures simple solutions as was the case with the famous Gordian knot. An increase in bank equity positions probably won't be the cure-all that the authors claim that it will be, and I don't think that implementing it will be as painless as they claim, but they did convince me that it can be implemented relatively painlessly and in simple terms that make evasion difficult and that it is likely to do more to bring greater stability to the system than anything else that has been proposed. Because bank reform requires political action, the simplicity of the solution proposed in this book has a huge advantage -- it can be described and advocated in a few words, it can be sloganized, and a substantial portion of the electorate will be able to more or less understand it.
The authors hint at other reforms that might be worth considering, such as breaking up the bigger banks into smaller businesses that are no longer too big to fail, or finding ways to make people who are part of the problem, such as managers and holders of junior debt or senior equity, bear more of the consequences when failures inevitably happen, but they don't really delve into those things because of their laser focus on the program of increasing equity requirements.
There is one other major problem area that the authors barely mention -- the banks' huge trading positions in derivatives. They do say at one point that one proposed solution is to return to Glass-Stegall and make banks go back to the core business of taking deposits and making loans against them, but they reject that approach by saying that banks failed even when they were in that business, which is true, but the risk of that kind of failure has been largely fixed by the deposit insurance system. Speculation in derivatives creates a new kind of risk that is exponentially greater. Derivative contracts by their nature are designed to use leverage to increase returns so the kind of debt/equity ratio that may make sense when looking at a business that takes deposits and makes loans may be too low for a business that also speculates in derivatives, for which the risk of going to zero is much greater and the equity cushion needs to be correspondingly increased. This is something that is directly relevant to the authors' discussion of how big the equity requirements should be, so I was sorry that they did not discuss it, but I understand that their point was to describe a simple solution to what they describe as a simple problem and to sweep aside all of the complexities as being nothing more than attempts to obscure the real issues. So I forgive the authors for glossing over this problem, but I would have liked to see a more in depth discussion of how derivatives fit into the picture. Maybe they can write another book that deals with that part of the equation.
This book hugely oversimplifies the problems that the banking system faces, but that is not necessarily a bad thing, because sometimes complexity obscures simple solutions as was the case with the famous Gordian knot. An increase in bank equity positions probably won't be the cure-all that the authors claim that it will be, and I don't think that implementing it will be as painless as they claim, but they did convince me that it can be implemented relatively painlessly and in simple terms that make evasion difficult and that it is likely to do more to bring greater stability to the system than anything else that has been proposed. Because bank reform requires political action, the simplicity of the solution proposed in this book has a huge advantage -- it can be described and advocated in a few words, it can be sloganized, and a substantial portion of the electorate will be able to more or less understand it.
The authors hint at other reforms that might be worth considering, such as breaking up the bigger banks into smaller businesses that are no longer too big to fail, or finding ways to make people who are part of the problem, such as managers and holders of junior debt or senior equity, bear more of the consequences when failures inevitably happen, but they don't really delve into those things because of their laser focus on the program of increasing equity requirements.
There is one other major problem area that the authors barely mention -- the banks' huge trading positions in derivatives. They do say at one point that one proposed solution is to return to Glass-Stegall and make banks go back to the core business of taking deposits and making loans against them, but they reject that approach by saying that banks failed even when they were in that business, which is true, but the risk of that kind of failure has been largely fixed by the deposit insurance system. Speculation in derivatives creates a new kind of risk that is exponentially greater. Derivative contracts by their nature are designed to use leverage to increase returns so the kind of debt/equity ratio that may make sense when looking at a business that takes deposits and makes loans may be too low for a business that also speculates in derivatives, for which the risk of going to zero is much greater and the equity cushion needs to be correspondingly increased. This is something that is directly relevant to the authors' discussion of how big the equity requirements should be, so I was sorry that they did not discuss it, but I understand that their point was to describe a simple solution to what they describe as a simple problem and to sweep aside all of the complexities as being nothing more than attempts to obscure the real issues. So I forgive the authors for glossing over this problem, but I would have liked to see a more in depth discussion of how derivatives fit into the picture. Maybe they can write another book that deals with that part of the equation.
August 4, 2024
The book has a few very important messages concerning the machinations of finance, but repeats itself many times. At some points Admati and Hellwig very clearly convey why banks need more equity, what equity is, banks' role in society, risks associated, historical context, and the role government. At other points, I found myself skipping much of the book in search of a new idea.
July 29, 2025
This was a good antidote to Jamie Dimon. It's hard to listen to the suave, handsome, and articulate CEO of JP Morgan and not find yourself agreeing with him. He's surrounded by an industry and a media that worship the ground he walks on, and he rarely finds himself in a challenging interview. When the authors of this book talk about big bankers being emperors who clothe themselves in arguments made of air, it's quite clear who they're picturing.
The role that big bankers have in establishing the prevailing ideology is still as strong as it was pre-2008. Bankers were the bad guys for about two seconds following the financial crash. In the preface to the 2024 edition, the authors state the obvious when you watch a finance podcast or read an article in the WSJ or FT:
"Many in the media and in academia are fascinated by the glamor of bank bosses and extoll the 'efficiency' of banking while overlooking the enormous harms it has caused and is still causing."
This book focuses on the financial crash and targets the ideology coming out of Wall Street that the banks now have it sorted and don't need regulation, etc. The authors' main focus is on increasing capital requirements for banks so that they have the ability to take greater losses before becoming insolvent.
But the best part of this book is the build-up as the authors take you through what capital (equity) and debt are in the context of banking, how over-indebtedness has caused problems in the past, and then into the 2008 financial crash. Chapter Five ("Banking Dominos") — on the who, what, and where of the financial crash — is a real highlight. It’s probably the best explanation of the crisis I've read, and really takes you through the mechanics of what made it a crisis beyond the usual “banks were greedy" etc. I always understood that the combination of securitisation, an excess of high-risk mortgages, and lack of regulation were the big causes, but I didn’t understand how the collapse of the money market and contagion actually played out in practice.
Their central argument (that the returns/risk associated with equity shouldn't be much different from debt) is hard to evaluate. The book overall reminds me of Stephanie Kelton’s The Deficit Myth in that its audience is so clearly the general reader (like me) and meant to be an introduction to the topic. For that reason, it’s hard to agree or disagree with them on some of their big points because they’ve only just finished explaining the basics in the previous chapter.
The book did a lot to expand my understanding of the “too big to fail” / “the bankers shouldn’t have been bailed out” discussion. It does amaze me now how much that discussion still circles around “they should’ve been allowed to fail” — as if (1) Lehman didn’t literally fail and almost bring down the world, and (2) people understand what it would actually mean to allow the global banking system to just suddenly collapse. It’s ideological, and ignores the reality of the immense harm it would inflict on the working class to have what is essentially the floor of capitalism pulled out while still trying to do capitalism. If a factory is badly run, we don’t want to burn it down, we want to take control of it and transform it.
When people say “let them fail,” they are very likely thinking about the bankers themselves bearing the losses (which is completely fair, and they absolutely should). But there’s a difference between that and allowing the institution to fail. I think the case of Evergrande is a good example of a state recognising a business gone bad and deciding we’re not going to let this fail (because it would be catastrophic), but we’re also not allowing business as usual (the fun is over), and instead you slowly unwind and liquidate. This is categorically not what happened in Europe and North America following 2008.
The book has fairly convinced me that, since the fall of Lehman, the next financial crisis won’t come from a bank that’s too big to fail, but one that’s too big to save (i.e. its losses are bigger than what governments can reasonably provide to save them, as was the case with Ireland in 2010, when banking losses were double GDP). The gigantic banks know that the state will always prevent them from failing. But with a US debt crisis looming over the next decade or two, it feels like an impossibility that a crash won’t push either the US banking sector or the US state into insolvency.
This is only compounded in my mind by my now clearer understanding of how inherently unprepared banks are to absorb any kind of substantial losses, how the profit motive driving banks is a complete death drive, how their complexity and interconnectedness — by design — is what allows them to be too big to fail, and how our primary source of information on this (the finance media) is just as incentivised to ignore all of this as the bankers themselves. Chapters 14 onwards (which I’d recommend along with Chapter 5) update the reader on where we are today (SVB failure, non-existent post-2008 regulations, etc.). It’s hard to read this book and not view the next crash as only a matter of time.
The role that big bankers have in establishing the prevailing ideology is still as strong as it was pre-2008. Bankers were the bad guys for about two seconds following the financial crash. In the preface to the 2024 edition, the authors state the obvious when you watch a finance podcast or read an article in the WSJ or FT:
"Many in the media and in academia are fascinated by the glamor of bank bosses and extoll the 'efficiency' of banking while overlooking the enormous harms it has caused and is still causing."
This book focuses on the financial crash and targets the ideology coming out of Wall Street that the banks now have it sorted and don't need regulation, etc. The authors' main focus is on increasing capital requirements for banks so that they have the ability to take greater losses before becoming insolvent.
But the best part of this book is the build-up as the authors take you through what capital (equity) and debt are in the context of banking, how over-indebtedness has caused problems in the past, and then into the 2008 financial crash. Chapter Five ("Banking Dominos") — on the who, what, and where of the financial crash — is a real highlight. It’s probably the best explanation of the crisis I've read, and really takes you through the mechanics of what made it a crisis beyond the usual “banks were greedy" etc. I always understood that the combination of securitisation, an excess of high-risk mortgages, and lack of regulation were the big causes, but I didn’t understand how the collapse of the money market and contagion actually played out in practice.
Their central argument (that the returns/risk associated with equity shouldn't be much different from debt) is hard to evaluate. The book overall reminds me of Stephanie Kelton’s The Deficit Myth in that its audience is so clearly the general reader (like me) and meant to be an introduction to the topic. For that reason, it’s hard to agree or disagree with them on some of their big points because they’ve only just finished explaining the basics in the previous chapter.
The book did a lot to expand my understanding of the “too big to fail” / “the bankers shouldn’t have been bailed out” discussion. It does amaze me now how much that discussion still circles around “they should’ve been allowed to fail” — as if (1) Lehman didn’t literally fail and almost bring down the world, and (2) people understand what it would actually mean to allow the global banking system to just suddenly collapse. It’s ideological, and ignores the reality of the immense harm it would inflict on the working class to have what is essentially the floor of capitalism pulled out while still trying to do capitalism. If a factory is badly run, we don’t want to burn it down, we want to take control of it and transform it.
When people say “let them fail,” they are very likely thinking about the bankers themselves bearing the losses (which is completely fair, and they absolutely should). But there’s a difference between that and allowing the institution to fail. I think the case of Evergrande is a good example of a state recognising a business gone bad and deciding we’re not going to let this fail (because it would be catastrophic), but we’re also not allowing business as usual (the fun is over), and instead you slowly unwind and liquidate. This is categorically not what happened in Europe and North America following 2008.
The book has fairly convinced me that, since the fall of Lehman, the next financial crisis won’t come from a bank that’s too big to fail, but one that’s too big to save (i.e. its losses are bigger than what governments can reasonably provide to save them, as was the case with Ireland in 2010, when banking losses were double GDP). The gigantic banks know that the state will always prevent them from failing. But with a US debt crisis looming over the next decade or two, it feels like an impossibility that a crash won’t push either the US banking sector or the US state into insolvency.
This is only compounded in my mind by my now clearer understanding of how inherently unprepared banks are to absorb any kind of substantial losses, how the profit motive driving banks is a complete death drive, how their complexity and interconnectedness — by design — is what allows them to be too big to fail, and how our primary source of information on this (the finance media) is just as incentivised to ignore all of this as the bankers themselves. Chapters 14 onwards (which I’d recommend along with Chapter 5) update the reader on where we are today (SVB failure, non-existent post-2008 regulations, etc.). It’s hard to read this book and not view the next crash as only a matter of time.
November 30, 2016
After this, I’ve had enough books about What Went Wrong With Banking. The trouble is, they all boil down to the same thesis: bankers took too many risks, banks became too heavily indebted, crisis ensued, but they’re still at it. There’s not much more to be said until some of suggestions for regulation that all these books suggest are actually followed, or some other radical change to banking occurs. I thus found 'The Bankers New Clothes' rather slow at first, as it goes over familiar ground without the edge of exciting reportage (Fool's Gold) or intense rage (Freefall: Free Markets and the Sinking of the Global Economy). I highly recommend both of the latter books, but was less impressed with The Storm: The World Economic Crisis & What It Means and Crisis and Recovery: Ethics, Economics and Justice. ‘The Bankers New Clothes’ goes out of its way to explain the ways in which banks obfuscate and justify themselves, in terms rather simpler than I really needed. The analogous mortgage examples get a bit repetitive and are somewhat US-specific. (UK mortgages do not allow you to hand back the keys and walk away from the debt under any circumstances, whereas in the US this is sometimes possible in negative equity situations.) It’s a good series of explanations for those with no prior economics knowledge, though, especially in terms of how ‘capital’ means something very different in a banking context. The much-repeated point about the importance of equity is well-made. Most books about the financial crisis don’t go to the same trouble to explain precisely why highly leveraged debt is so dangerous.
The purpose of this book is to dismantle fallacious narratives that banks use to (successfully) prevent reform of their industry. I think it achieves that with its measured tone and painstaking explanations. In particular, I liked the clarity about the linkage between poor risk management and fixation upon ROE (Return on Equity), which banks use as their metric of success and basis for bonuses. The most interesting parts to me were the final chapters discussing the Basel II and III agreements on banking reform and the extent of regulatory capture. I also couldn’t help noticing that the actual text consisted of 228 pages, followed by another 133 pages of notes and references. I couldn’t quite bring myself to do more than skim these, but they look very thorough. This is a somewhat stolid book, more textbook than reportage. Nonetheless, the content is enraging in light of how little banking has been changed by the catastrophic failures of 2007-8. My personal reading experience was in the three star realm, however I settled on four because I recommend it as a primer on What Went Wrong With Banking.
The purpose of this book is to dismantle fallacious narratives that banks use to (successfully) prevent reform of their industry. I think it achieves that with its measured tone and painstaking explanations. In particular, I liked the clarity about the linkage between poor risk management and fixation upon ROE (Return on Equity), which banks use as their metric of success and basis for bonuses. The most interesting parts to me were the final chapters discussing the Basel II and III agreements on banking reform and the extent of regulatory capture. I also couldn’t help noticing that the actual text consisted of 228 pages, followed by another 133 pages of notes and references. I couldn’t quite bring myself to do more than skim these, but they look very thorough. This is a somewhat stolid book, more textbook than reportage. Nonetheless, the content is enraging in light of how little banking has been changed by the catastrophic failures of 2007-8. My personal reading experience was in the three star realm, however I settled on four because I recommend it as a primer on What Went Wrong With Banking.
November 26, 2020
The purpose of this book is to demystify financial language. Bankers use many misleading terminologies and claims which confuse everyone including politicians and regulators. Admati and Hellwig explain what finance is, does, and the fallacies created by misuse of language. Using a parable of The Emperor’s New Clothes, pointing out the misleading claims and language of bankers in order to take appropriate actions. This book does a wonderful job at elucidating the claims of bankers to understand policy discussions and evaluate the claims.
Banks contribute to making smooth economic exchanges via payment system infrastructure. Borrowing is an essential feature of a well and efficient functioning economy. Banks are more experienced in investigating the ability of others to pay loans than others. When functioning appropriately, borrowing creates opportunities to make large investments which would otherwise not be able to financed. But borrowing also magnifies the borrower’s risk. When the economy is booming the investment earns more than the debt servicing, but the risk of investment default magnifies the cost of debt servicing. By not taking account of the potential loss of investment, banks can easy claim that borrowing is cheaper than equity. Equity reduces the potential gain and loss from an investment as the shareholders carry the risks. When banks did not have guaranteed bailouts, they used to have large amounts of equity to attract borrowers.
A misleading term in banking is capital. Banks claim capital requirement will limit the ability of the banks to lend money, but capital requirements are not reserve requirement. Capital requirements refer to equity in the bank. Equity is a source of funding for lending, not a restriction. With more equity in the bank, the owners of the bank will have to pay the price should the bank fail. Banks considers equity expensive because they will have be forced to pay for the their mismanagement of risk rather than their lenders or taxpayers. Bankers benefit from the fragility of the financial system, but it imposes costs on everyone else. Unlike the claim of bankers that safety would hurt everyone, making banks safer would create stability without reducing lending or hurting the economy.
Banks normally function based on maturity transformation. Making long duration loans of high interest rates while borrowing short duration loans of low interest rates. Most bank assets are long term which are not readily transformed into payments, which causes liquidity problems. This problem is normally surmountable, while the problem of not having enough assets to pay loans posses economy wide problems.
The close to certain guaranteed government bailout of financial industry creates perverse incentives within the industry. The income generated by risky loans stays with those who made the loans, while the costs of default derived from those loans is borne by taxpayers. As bankers keep their prior earnings from the defaulted loans, there is an incentive to produce loans no matter their quality as they will not carry the costs of problems. The bailout guarantee also reduces the interest rate cost of bank borrowing, as their lenders know that they will regain their money should the bank default. The lowered interest rate acts as a subsidy to the financial industry and prevents policies which would make banks safer. The guarantee subsidies the creation of a more risky and dangerous financial industry.
Bank regulation changes how banks behave, to either more risky practices or safer practices. Even before repeal of Glass-Steagall, banks have been defaulting due to many problems. Some decades saw very little bank defaults due to the performance of the rather than quality banking practices. Banks have always been risky, but also tried to better position that risk. Securitization which was supposed to facilitate safe practices, ended up transferring risk to others while creating more risk. Risk does not disappear, rather, it is a matter of by whom the risk is borne on default.
Part of the reason for bailing out banks lies with contagion. If a bank owes debts to other institutions and goes bankrupt, it may cause the other institutions to go bankrupt as well. The interconnectedness of the financial system can spark global economic problems. Authorities are concerned about large institutions going bankrupt, but not so much small institutions creating a need to grow big to gain a guarantee from the government.
This book’s main solution is to have banks have more equity as it would reduce the risk that the banks cannot pay their debts and reduce their risk taking to protect that equity. The problem with this is who owes the equity. As the authors point out, corporations tend to fund themselves with equity and debt, while banks tend to only use debt. Corporate equity shows that the employees, such as the CEO, do not always have the best incentives for the company as any damages would be borne by shareholders and not the CEO. Meaning, the officers of the bank would not by necessity change their risk behavior if the equity is not owned by the officers of the bank. Equity is seen as a panacea to all bank woes, but it can create perverse incentives as well.
This book is an eloquent description of banking structure. The focus tends to be on potential defaults, but that is because they are usually ignored in favor of more optimistic default-less future. Admati and Hellwig do a wonderful job at showing ways that debt creates risk and alternatives to debt. Making opaque the confusions created by bankers. Exposing many arguments as misleading and fallacious. Banks provide a fundamental service to all economies, but they also pose risks to those economies. The incentives given to bankers should not be perversely in favor of creating costs to societies they serve as current policies do. What is needed is to limit the risks posed without limiting the benefits they provide, which can be done with equity.
Banks contribute to making smooth economic exchanges via payment system infrastructure. Borrowing is an essential feature of a well and efficient functioning economy. Banks are more experienced in investigating the ability of others to pay loans than others. When functioning appropriately, borrowing creates opportunities to make large investments which would otherwise not be able to financed. But borrowing also magnifies the borrower’s risk. When the economy is booming the investment earns more than the debt servicing, but the risk of investment default magnifies the cost of debt servicing. By not taking account of the potential loss of investment, banks can easy claim that borrowing is cheaper than equity. Equity reduces the potential gain and loss from an investment as the shareholders carry the risks. When banks did not have guaranteed bailouts, they used to have large amounts of equity to attract borrowers.
A misleading term in banking is capital. Banks claim capital requirement will limit the ability of the banks to lend money, but capital requirements are not reserve requirement. Capital requirements refer to equity in the bank. Equity is a source of funding for lending, not a restriction. With more equity in the bank, the owners of the bank will have to pay the price should the bank fail. Banks considers equity expensive because they will have be forced to pay for the their mismanagement of risk rather than their lenders or taxpayers. Bankers benefit from the fragility of the financial system, but it imposes costs on everyone else. Unlike the claim of bankers that safety would hurt everyone, making banks safer would create stability without reducing lending or hurting the economy.
Banks normally function based on maturity transformation. Making long duration loans of high interest rates while borrowing short duration loans of low interest rates. Most bank assets are long term which are not readily transformed into payments, which causes liquidity problems. This problem is normally surmountable, while the problem of not having enough assets to pay loans posses economy wide problems.
The close to certain guaranteed government bailout of financial industry creates perverse incentives within the industry. The income generated by risky loans stays with those who made the loans, while the costs of default derived from those loans is borne by taxpayers. As bankers keep their prior earnings from the defaulted loans, there is an incentive to produce loans no matter their quality as they will not carry the costs of problems. The bailout guarantee also reduces the interest rate cost of bank borrowing, as their lenders know that they will regain their money should the bank default. The lowered interest rate acts as a subsidy to the financial industry and prevents policies which would make banks safer. The guarantee subsidies the creation of a more risky and dangerous financial industry.
Bank regulation changes how banks behave, to either more risky practices or safer practices. Even before repeal of Glass-Steagall, banks have been defaulting due to many problems. Some decades saw very little bank defaults due to the performance of the rather than quality banking practices. Banks have always been risky, but also tried to better position that risk. Securitization which was supposed to facilitate safe practices, ended up transferring risk to others while creating more risk. Risk does not disappear, rather, it is a matter of by whom the risk is borne on default.
Part of the reason for bailing out banks lies with contagion. If a bank owes debts to other institutions and goes bankrupt, it may cause the other institutions to go bankrupt as well. The interconnectedness of the financial system can spark global economic problems. Authorities are concerned about large institutions going bankrupt, but not so much small institutions creating a need to grow big to gain a guarantee from the government.
This book’s main solution is to have banks have more equity as it would reduce the risk that the banks cannot pay their debts and reduce their risk taking to protect that equity. The problem with this is who owes the equity. As the authors point out, corporations tend to fund themselves with equity and debt, while banks tend to only use debt. Corporate equity shows that the employees, such as the CEO, do not always have the best incentives for the company as any damages would be borne by shareholders and not the CEO. Meaning, the officers of the bank would not by necessity change their risk behavior if the equity is not owned by the officers of the bank. Equity is seen as a panacea to all bank woes, but it can create perverse incentives as well.
This book is an eloquent description of banking structure. The focus tends to be on potential defaults, but that is because they are usually ignored in favor of more optimistic default-less future. Admati and Hellwig do a wonderful job at showing ways that debt creates risk and alternatives to debt. Making opaque the confusions created by bankers. Exposing many arguments as misleading and fallacious. Banks provide a fundamental service to all economies, but they also pose risks to those economies. The incentives given to bankers should not be perversely in favor of creating costs to societies they serve as current policies do. What is needed is to limit the risks posed without limiting the benefits they provide, which can be done with equity.
June 6, 2019
This is a must read, especially if finance is not your forte. Anat Admati and Martin Hellwig take a topic that is as equally unbearably boring as it is essential for the well-being of society, and make it understandable for the general public. That was their stated objective early in the book, and I think they accomplished that. What they reveal is not what those running the finance industry want people to understand, as it exposes alternative ways to make the finances of people whole and not just the banks. The bankers' new clothes are fallacies and bills of goods sold to politicians and the public, and the authors rip off those false threads to expose the bankers' beauty marks for all to see.
Among the many solutions they advocate are appropriate regulations on banks, and the enforced separation of the interests of supervisors and those financial institutions they regulate. These measures include greater equity requirements in banks before they pay out to share holders, limitations on leveraged debt, and restrictions on "innovations" such as mortgage-related securities and collateralized loan obligations to hide their true debt exposure. And perhaps (in my opinion) the sea change most needed is having banks and their officers evaluated in light of the long term benefits for the bank's health, and claw back previous bonuses if their actions produce negative returns in future years. The short term profit motive must be removed.
We don't need financial wizards running banks; we need competent and faithful accountants—let the über-smart people go back into science and medicine, where they belong and are the most needed.
Among the many solutions they advocate are appropriate regulations on banks, and the enforced separation of the interests of supervisors and those financial institutions they regulate. These measures include greater equity requirements in banks before they pay out to share holders, limitations on leveraged debt, and restrictions on "innovations" such as mortgage-related securities and collateralized loan obligations to hide their true debt exposure. And perhaps (in my opinion) the sea change most needed is having banks and their officers evaluated in light of the long term benefits for the bank's health, and claw back previous bonuses if their actions produce negative returns in future years. The short term profit motive must be removed.
We don't need financial wizards running banks; we need competent and faithful accountants—let the über-smart people go back into science and medicine, where they belong and are the most needed.
June 29, 2018
An interesting post-financial crisis book about banking regulation. Wait, come back! It's aimed at the layperson so is an easy read. Basically, banks take huge risks and develop complex and complicated financial instruments that attempt to hide the risks. They are in a somewhat unique position in that their stability affects society as a whole, as opposed to just the owners and investors affected by other businesses. Instead of treating this as a great and serious responsibility, they take advantage of it in every way in order to make more money.
The solution from Admati & Hellwig is for banks to be less leveraged by having a far higher proportion of their assets backed by equity/capital. If this causes some banks to be devalued or go out of business, that is too bad.
Even after the Great Financial Crisis, politicians and regulators are not willing to take important steps to limit the risks posed by reckless banks to wider society. This is a time more than ever to reject politicians, companies and lobbyists that espouse anti-regulation policies and free-market dogmatism.
The solution from Admati & Hellwig is for banks to be less leveraged by having a far higher proportion of their assets backed by equity/capital. If this causes some banks to be devalued or go out of business, that is too bad.
Even after the Great Financial Crisis, politicians and regulators are not willing to take important steps to limit the risks posed by reckless banks to wider society. This is a time more than ever to reject politicians, companies and lobbyists that espouse anti-regulation policies and free-market dogmatism.
February 7, 2021
Um livro escrito por quem verdadeiramente compreende questões relacionadas com a economia e finança atuais e que descreve com uma frieza implacável os vício da banca mundial de hoje e de que maneira os banqueiros e outras elites económica nos conseguem convencer de que certos comportamentos e hábitos são essenciais para se manter estabilidade na economia quando, na grande maioria das vezes, esses hábitos são altamente lesivos à atividade económica.
August 9, 2017
Tedious and centralized to a single, over-simplified idea. Also, there was a part in the book that'd mentioned how "all stocks" issue dividends. I work in finance and that's simply untrue; companies are under no obligation to issue dividends (e.g., certain growth and speculative stocks).
December 5, 2018
I did not finish the book. During the first part, the authors thoroughly describe the causes of many of the bank crises since the 19th century putting a lot of blame on misguided government regulation. Then they propose more regulation as the solution. It was at that point that I quit reading.
January 17, 2016
I was excited to see this book published... that is until I read it. It's a weird mix of condescendingly simple and complexingly unreadable. Don't waste your time.
May 29, 2014
This woman is an ultimate warrior and Jamie Dimon's worst nightmare. No one is to big to jail. Fantastic book.
August 17, 2014
Makes a very strong case that banks should be deleveraged and depend on equity just like other corporations
January 3, 2015
By far the best book I've read on the global financial crisis.
May 9, 2015
Focused to a fault. An excellent introductory text nonetheless.
February 24, 2019
300 pages too long to present the message about the dangers of unregulated banking and current equity balance requirements.
October 4, 2025
citEști „The Bankers' New Clothes”, de Anat Admati și Martin Hellwig : O poveste pe bani
„Cele mai multe investiții implică riscuri” (p.13) „The Bankers' New Clothes”, de Anat Admati și Martin Hellwig, Princeton University Press, New and expanded edition, 2024
https://www.youtube.com/watch?v=jsWQB...
Te-oi fi gândit că poveștile rămân o amintire din copilărie. Dar uite că unele își fac loc în modul în care s-ar putea să te ajute să privești actualitatea. În „The Bankers' New Clothes”, Anat Admati și Martin Hellwig îți dezleagă țesăturile de relații și influențe care expun sistemul bancar unor riscuri nu tocmai străine de evenimentele ultimelor decenii. Cum se împacă încrederea de care au nevoie instituțiile financiare cu lipsa de supraveghere independentă a limitelor pe care sunt dispuse să le depășească încă nu ai aflat. Dar ai de unde începe.
„Ca să înțelegem problema - și să vedem prin noile haine ale bancherilor- e important să înțelegem relația dintre împrumut și risc” (p.13) „The Bankers' New Clothes”, de Anat Admati și Martin Hellwig, Princeton University Press, New and expanded edition, 2024
„Dacă legea limitează unii oameni, de obicei asta se întâmplă ca să-i împiedice pe aceștia să confiște drepturile și libertățile altora”.(p.350) „The Bankers' New Clothes”, de Anat Admati și Martin Hellwig, Princeton University Press, New and expanded edition, 2024
„Cele mai multe investiții implică riscuri” (p.13) „The Bankers' New Clothes”, de Anat Admati și Martin Hellwig, Princeton University Press, New and expanded edition, 2024
https://www.youtube.com/watch?v=jsWQB...
Te-oi fi gândit că poveștile rămân o amintire din copilărie. Dar uite că unele își fac loc în modul în care s-ar putea să te ajute să privești actualitatea. În „The Bankers' New Clothes”, Anat Admati și Martin Hellwig îți dezleagă țesăturile de relații și influențe care expun sistemul bancar unor riscuri nu tocmai străine de evenimentele ultimelor decenii. Cum se împacă încrederea de care au nevoie instituțiile financiare cu lipsa de supraveghere independentă a limitelor pe care sunt dispuse să le depășească încă nu ai aflat. Dar ai de unde începe.
„Ca să înțelegem problema - și să vedem prin noile haine ale bancherilor- e important să înțelegem relația dintre împrumut și risc” (p.13) „The Bankers' New Clothes”, de Anat Admati și Martin Hellwig, Princeton University Press, New and expanded edition, 2024
„Dacă legea limitează unii oameni, de obicei asta se întâmplă ca să-i împiedice pe aceștia să confiște drepturile și libertățile altora”.(p.350) „The Bankers' New Clothes”, de Anat Admati și Martin Hellwig, Princeton University Press, New and expanded edition, 2024
July 6, 2024
I read the 2023 version, which includes updates around the Silicon Valley Bank and Credit Suisse failures.
The overarching theme that the authors try to convey (in a pretty long-winded fashion), is that banks need more equity in their business. Their proposed amount is 20-30%, which goes far beyond existing regulations. As the authors acknowledge, this is a very uphill task given how addicted and leveraged banks are, in no small part due to cheap funding available ad a result of implicit guarantees of central bank backstops.
While the concerns are legitimate, this seems like an academic theoretical exercise that is difficult to implement in real life. The authors suggest banks inject equity by issuing new shares or using retained earnings. While the latter could reduce dividends, they think shareholders will not mind as the business will be more robust and reinvested earnings could fund profitable projects.
I take issue with this assumption. Numerous investors buy bank stocks for dividends. Reducing that would mean investor exodus, period. No one invests in bank stocks for growth.
The overarching theme that the authors try to convey (in a pretty long-winded fashion), is that banks need more equity in their business. Their proposed amount is 20-30%, which goes far beyond existing regulations. As the authors acknowledge, this is a very uphill task given how addicted and leveraged banks are, in no small part due to cheap funding available ad a result of implicit guarantees of central bank backstops.
While the concerns are legitimate, this seems like an academic theoretical exercise that is difficult to implement in real life. The authors suggest banks inject equity by issuing new shares or using retained earnings. While the latter could reduce dividends, they think shareholders will not mind as the business will be more robust and reinvested earnings could fund profitable projects.
I take issue with this assumption. Numerous investors buy bank stocks for dividends. Reducing that would mean investor exodus, period. No one invests in bank stocks for growth.
July 9, 2024
The Bankers' New Clothes: What's Wrong With Banking and What to Do About It" is a compelling critique of the banking industry, offering a stark examination of its flaws and proposing insightful solutions. Anat Admati and Martin Hellwig meticulously dissect the structural deficiencies that plague banking systems worldwide, advocating for robust reforms to enhance financial stability and accountability. Their rigorous analysis challenges conventional wisdom, making a compelling case for stronger regulations and capital requirements to safeguard against future crises. For anyone seeking a deeper understanding of the complexities within modern banking, this book is an indispensable read. IT technologies have become indispensable in every sector today, especially in banking. If you're looking to explore cutting-edge solutions in banking IT, check out Alty https://alty.co/, because they offer innovative digital banking transformation services that could be just what you need!
September 12, 2024
Requiring banks to hold more capital relative to their assets is a commendable idea, but the levels proposed by the authors—20-30% of total assets—seems impractical to me. While such high levels may be challenging to implement, increasing capital does provide a more robust shock absorber during macroeconomic stress, such as during the Global Financial Crisis. This additional capital not only enhances the resilience of banks but also boosts consumer confidence in the stability of the financial system. There are talks of increasing capital requirements for banks in Kenya. This book presents a thought-provoking analysis of these issues, and while the proposals may spark debate, they are crucial for rethinking how we safeguard our financial infrastructure.
January 12, 2019
This book's main argument is that banks need to be more heavily capitalized. It uses a simple example, the financing of a $300K house, to examine how the financing of banks is affected by various options: equity, loan guarantees, change in value of the property. It is amazing how much can be gained by sticking with this example. The book's weakness is that it makes no attempt to explain more complicated issues (regulation's complexity) so you have to go elsewhere to understand how these issues fit in to the argument. But even if you understand much of what is discussed this book is useful because it provides simple examples that you can use to understand the news.
February 16, 2020
By far the best analysis on banking industry from a global perspective. It also doesn't fall into the traditional Occupy Wall Street vs. Free Market ideology warfare. This book is backed with concrete research & real data.
Could have been a 5 stars book had the author not keep repeating himself in the middle portion of the book. It was painful to read when he is stating the same point for the 7th time in 3 chapters... Take out the repetitiveness, easily shave off 60 pages of the book and become a easy 5 star book!
Could have been a 5 stars book had the author not keep repeating himself in the middle portion of the book. It was painful to read when he is stating the same point for the 7th time in 3 chapters... Take out the repetitiveness, easily shave off 60 pages of the book and become a easy 5 star book!
November 21, 2020
The authors begin by attacking the notion that ‘banks should be highly leveraged’. They argue throughout the book that this is not a necessity and should not be the case. They argue that the downside effect of high leverage banking is much worse than its advantages.
They call regulators to increase banking regulations. They argue that regulators should substantially and quickly raise banks’ regulatory capital. However, since this sudden and strong change would decrease the money supply in the market, and hence harming the economy, they suggest that such equity should be taken from shareholders or bank profits (i.e. stop paying dividends until they get the capital right).
I agree with the Authors on their ‘description’ to the problem in banking nowadays. However, their ‘prescription’ does not look practical. I believe that the implementation is more complex than the Authors portrayed in the book. For example, concerning raising banks’ capital using equity, I do not believe that investors will pour their money to invest in low-leverage banks. From the investors/shareholders point of view, investing in high equity capital banks provide less return on equity. Thus, investors might refuse to invest (it is difficult to force them), which might eventually push governments to step-in (something we want to avoid).
I believe that all countries in the world should agree (at least major economies such as the USA, China, European Union) to implement these changes at once. Otherwise, I cannot see how the proposed solutions can be implemented in reality.
Generally, the book is very easy to read. Very clear examples are provided. I believe even those who have a limited background in banking will be able to read and understand this book.
They call regulators to increase banking regulations. They argue that regulators should substantially and quickly raise banks’ regulatory capital. However, since this sudden and strong change would decrease the money supply in the market, and hence harming the economy, they suggest that such equity should be taken from shareholders or bank profits (i.e. stop paying dividends until they get the capital right).
I agree with the Authors on their ‘description’ to the problem in banking nowadays. However, their ‘prescription’ does not look practical. I believe that the implementation is more complex than the Authors portrayed in the book. For example, concerning raising banks’ capital using equity, I do not believe that investors will pour their money to invest in low-leverage banks. From the investors/shareholders point of view, investing in high equity capital banks provide less return on equity. Thus, investors might refuse to invest (it is difficult to force them), which might eventually push governments to step-in (something we want to avoid).
I believe that all countries in the world should agree (at least major economies such as the USA, China, European Union) to implement these changes at once. Otherwise, I cannot see how the proposed solutions can be implemented in reality.
Generally, the book is very easy to read. Very clear examples are provided. I believe even those who have a limited background in banking will be able to read and understand this book.
March 5, 2018
A really insightful read into what is fundamentally the core issue with the banking industry in general. More or less , saving money is not a safe endeavour at least with investment and commercial banks because of their some what lackadaisical actions towards the handling of others money, there are solid solutions, much like bringing them back off the freedom to make ridiculous amounts of money without care for the fact that other peoples money is at much the same stake as everything else.
December 26, 2018
I didn't finish it. I probably read 65-70% of the book. I listened to it on audible and returned it. I think I would have liked the book more if it I had read it. Not a big fan of the narrator - very boring. I think she narrates for the economist which is fine, but not for this book. In all, a good explanation that banks are allowed to leverage way too much. Should go back to leverage on 90% equity, not 95 or 98%. It would create more stability in downturns.
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May 10, 2025I found the 2024 update around the demise of Silicon Valley Bank and Credit Suisse not very helpful and rather know-it-all.
There is a good paper from the FED and FDIC on the demise of Silicon Valley Bank which reflects the failure of the bank and the self-reflective findings of the regulators.
On the downfall of Credit Suisse there is the 'PUK Report' or the book 'Der Fall der Credit Suisse'
There is a good paper from the FED and FDIC on the demise of Silicon Valley Bank which reflects the failure of the bank and the self-reflective findings of the regulators.
On the downfall of Credit Suisse there is the 'PUK Report' or the book 'Der Fall der Credit Suisse'
July 18, 2018
Simplistic presenttion of the argument, but makes the point clear. Knowing that this book is for a greater audience, it is understandable that the argument would be presented in a simpler form. However, I think it becomes reductionist in some parts of the book. Still a respectable writer who definitely did her research.
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