The Bankers’ New Clothes: A Timely Update on our Fragile Banking System
Co-authors Anat Admati and Martin Hellwig
Ten years after publishing The Bankers’ New Clothes, CASI co-faculty director Anat Admati and her co-author Martin Hellwig have updated their highly acclaimed book, with a new preface and four new chapters that expose the shortcomings of current policies.
The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It-- New and Expanded Edition picks up where the Global Financial crisis left off, revealing new systemic weaknesses and showing how the dominance of banking endangers the rule of law and democracy itself. The Bankers New Clothes offers a renewed call for responsible regulation before the next crisis appears.
Presentations
The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It
World Bank Group, Washington, DC I Anat Admati, 06/18/2024
The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It
London School of Economics (LSE) | Anat Admati, 05/09/2024
The Bankers' New Clothes: What's Wrong with Banking and What to Do About It
King’s College London (KCL) I Anat Admati, 05/08/2024
Short Cut with Martin Hellwig and Martin Wolf: On Dangerous Banks and Political Power
Forum New Economy I Martin Hellwig and Martin Wolf, 04/16/2024
Making Banking Systems More Resilient and Stable
Inter-American Development Bank, Washington DC I Anat Admati, 04/16/2024
Capitalism: what has gone wrong, what needs to change, and how can it be fixed?
Seminar at Blavatnik School I University of Oxford, April 16, 2021
Watch the full webinar here. Anat Admati appears at 33:48-46:07
How Banking Undermines Democracy: Anat Admati
Freeman Spogli Institute, Center on Democracy, Development and the Rule of Law, Stanford University, 01/11/2024
Read and watch the event here.
Media Highlights
Banks will beat Basel III for all the wrong reasons
Todd H. Baker, Financial Times 07/01/2024
The publication of The Bankers’ New Clothes in 2013 was an intellectual thunderbolt, widely lauded and named a book of the year by the FT, the Wall Street Journal, and Bloomberg Businessweek. Martin Wolf called it “the most important book to have come out of the financial crisis”. The second edition drew more accolades from academics, public policy experts and financial commentators. Admati and Hellwig emphasise that high leverage in banking is a choice, not a necessity, and that banks are no different from other corporations when it comes to the benefits and risks of leverage for shareholders, management and society.
Best summer books of 2024: Economics
Martin Wolf, Financial Times, 06/18/2024
This is the second edition of the most original and important book to have emerged from the financial crisis of 2007-08. In it, the authors explain that not enough has changed since then to make banking safe. On the contrary, the highly profitable — for banks — moral hazard of being “too big to fail” largely remains and so, too, do bailouts.
The Bankers’ New Clothes – review
Hans G Despain, LSE Review of Books 06/19/2024
In their book, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It, Anat Admati and Martin Hellwig aim to demystify banking and high finance in a language accessible to the general public. They contend that this hegemonic Orwellian attitude of “leave it to the experts” enriches bankers but endangers society by generating financial crises and economic recessions and poses a fundamental threat to the order of law and democracy itself.
Accountability Holds the Key to Restoring Trust in Democracy
Anat Admati OpEd, Project Syndicate, 06/10/2024
Recklessness, deception, and inadequate regulations are more likely to persist when the damage is not immediately apparent, the victims and perpetrators are dispersed, and the issues are poorly understood. As I explained in a recent commentary, this is especially true in the banking sector. In the updated and expanded edition of our book The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It, Martin Hellwig and I examine how and why banking regulations fail and bailouts persist. These outcomes, we argue, ultimately erode democracy and undermine the rule of law.
Read the full opinion piece here.
Bailouts forever
Alex Tabarrok, Marginal Revolution, 05/31/2024
Admati and Hellwig write: The 2010 Dodd-Frank Act in the United States promised the end of bank bailouts and “too-big-to-fail” institutions. The European Union’s 2014 legislation for dealing with banks likely to fail was claimed to provide “a framework” to “deal with banks that experience financial difficulties without either using taxpayer money or endangering financial stability.” In November 2014, Mark Carney, at the time the governor of the Bank of England and chair of the Financial Stability Board (FSB), a body of financial regulators from around the world, announced triumphantly that an agreement about new rules for the thirty largest and most complex, “globally systemic” financial institutions would prevent bailouts in the future. Many people in politics and the media believed these claims.
Can democracy take stock of Wall Street?
David Dagan, Hypertext, 05/23/2024
On both sides, Wall Street titans’ collapse and subsequent frantic rescue seemed like a metaphor for capitalist malaise — a system run increasingly on shell games and insider protection over innovation and market discipline, with ordinary people left behind.
That is the grim reality Anat Admati and Martin Hellwig laid out in their epic explainer, “The Banker’s New Clothes,” written in the wake of the 2008 financial crisis and now updated for the post-Trump era of regulation. In the book, the authors persuasively argue that the surest way to prevent a repeat of the 2008 disaster is to require that banks, like most other corporations, fund their operations with much less debt and much more equity investment.
Bailouts forever
Regulators say too-big-to-fail is over. Markets don't believe them - and recent history shows why.
Anat Admati and Martin Hellwig, Hypertext (on Substack), 05/23/2024
One may wonder why the regulators designed rules for dealing with failing banks without considering the possibility that such a bank would lose the investors’ trust. If a bank is highly distressed, it is natural for investors to doubt whether it is solvent and for trust to disappear. Any rules for dealing with failing banks should be designed to work even in that plausible scenario. If the regulators did not imagine such a scenario, the question is why they were so naïve.
Read the full opinion piece here.
Wall Street’s Megabanks Have Trillions of Dollars Off-Balance Sheet, in a Replay of Accounting Hubris that Led to the 2008 Wall Street Collapse
Pam Martens and Russ Martens, Wall Street on Parade, 05/02/2024
In January of this year, Anat Admati, Professor of Finance and Economics at Stanford Graduate School of Business, and German economist Martin Hellwig, released an updated and expanded version of their 2013 book The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. In it, the authors write:
Some of the risks that make JPMorgan Chase dangerous cannot actually be seen by looking at its balance sheet because the positions that give rise to them are not included there. These are risks from business units that JPMorgan Chase might own in part or that it sponsors, and to which it has provided guarantees to serve as a backstop if they should have funding problems.
The continuing financial fragility of banks
Charles Goodhart, LSE Business Review 04/30/2024
Admati and Hellwig are correct when they note that our banking systems remain fragile and that such fragility could be greatly reduced if banks became less levered, with significantly more equity and less debt. In principle, this should leave profitability and the net worth of commercial banks unchanged, with the payment of more dividends on a wider equity base being offset by a reduction in interest payments, both from a lower level of debt and lower interest rates, since debt would now be safer.
Book launch tackles big issues
London Business School, 04/08/2044
Banks should be required to hold equity levels of 20-30% against all lending. That is the recommendation of Anat R Admati, George G.C. Parker Professor of Finance and Economics at the Stanford Graduate School of Business, and Martin Hellwig, Director of the Max Planck Institute for Research on Collective Goods.
The co-authors were speaking at London Business School (LBS) at the launch the latest edition of their highly acclaimed book, The Bankers' New Clothes: What's Wrong with Banking and What to Do About It.
Nonsense and Bad Rules Persist in Banking
Anat Admati OpEd, Project Syndicate, 04/08/2024
In December, the CEOs of the eight largest banks in the United States participated in a three-hour posturing session before the Senate Banking Committee. It was a disheartening display that showcased the toxic blend of politics and asinine rhetoric that often characterizes discussions about banking. Much of the hearing focused on proposed banking regulations known as the “Basel 3 Endgame.”
Read the full opinion piece here.
Opinion: Memo to Jamie Dimon and other bankers: What benefits large banks doesn’t necessarily benefit Americans
Anat Admati, Published in Marketwatch, 04/08/2024
… Prudent banks insist on borrowers having "skin in the game" when they lend, yet vehemently oppose regulations aimed at reducing their dangerous reliance on borrowing. Banks' aversion to equity funding and addiction to borrowing enables them to shift costs and risks to others, ultimately benefiting at public expense. They often get away with it by keeping politicians and the public confused.
The Banker
Anat Admati and Martin Hellwig, 03/18/2024
When Silicon Valley Bank failed, the most shocking fact was not the deposit run or the role of social media but the supervisors’ failure to recognise the bank’s technical insolvency months earlier. Even today, official narratives ignore the solvency problems that eventuallycaused the run and the flaws in the rules that allowed these problems to remain hidden.
The Bankers’ New Clothes: An interview with Stanford’s Anat Admati
Francine McKenna, The Dig (on Substack), 03/06/2024
On February 27 I took the train to Princeton to hear my friend Anat Admati talk about the new edition of her book, The Bankers’ New Clothes. Anat R. Admati is the George G.C. Parker Professor of Finance and Economics at Stanford Graduate School of Business (GSB) and a senior fellow at Stanford Institute for Economic Policy Research.
This is the 10th-anniversary update that has recently been published. The completely new section IV is great!
Anat Admati on How to Never Bail Out Banks Again
Bloomberg, Odd Thoughts podcast, 03/04/2024
What did we learn from the March 2023 banking crisis? And what could we be doing differently now? In this episode, we speak with Anat Admati, professor at Stanford Graduate School of Business, about why bank bailouts (in all their different varieties) persist and what can be done about it. Admati discusses why banks are structurally disincentivized to behave like other types of companies, the impact of new capital requirements including the Basel Endgame proposal, and competition with other types of lenders including private credit.
Listen to the full podcast here.
Money Life with Chuck Jaffe
moneylifeshow.com , 01/24/2024
Stanford University professor Anat Admati, co-author of The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It, discusses how the collapse of Silicon Valley Bank and other troubles that occurred in 2023 are not really over, and why the system that has immunized banks from most troubles has also ensured that troubles will keep happening.
Listen to the full podcast here.
More Regulation? Big Banks Say They’re Safe Enough Already.
Peter Coy, New York Times, 01/22/2024
The backsliding appalls a lot of economists, among them Anat Admati, a professor of finance and economics at Stanford’s Graduate School of Business. Admati is a co-author with Martin Hellwig, a German economist, of a 2013 book on pretty much exactly this topic, “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It.” (An updated edition of the book just came out.)
“It just sickens me,” Admati told me last week. “It doesn’t have an economic rationale, beginning to end.”
Read the full opinion piece here.
Capitalisn’t: The Capitalisn’t of Banking with Anat Admati
Capitalisn’t Podcast, Chicago Booth Review, 01/18/2024
Anat Admati joins Capitalisn’t hosts Bethany McLean and Luigi Zingales to discuss the updated edition of her and Martin Hellwig’s book, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It. Dissecting new financial developments, including the failure of Silicon Valley Bank, the crypto industry, and shadow banking, Admati lays bare how the current financial system is rigged for the benefit of the few. She also prescribes how we can build and regulate a fairer and more accountable financial system and, thus, a more stable and equitable capitalist economy.
Listen to the full podcast here.
The Bankers’ New Clothes -Book excerpt
By Anat Admati, Martin Hellwig ProMarket, 01/18/2024
“The global banking system was so fragile in 2007–2009 that it was unable to withstand the impact of the decline in U.S. housing prices. The breakdowns of financial institutions and the declines in asset prices were stopped only when central banks and governments provided massive bailouts and supports. We wrote this book to explain why the system had become so fragile and how it had broken down, and to advocate for better rules.” Read the full excerpt here
Out Today: A Deep Dive into the Dark Side of Banking and its Handmaiden, Central Banks
Pam Martens and Russ Martens, Wall Street on Parade, 01/09/2024
“It is a must read for every American who is bold enough to remove their media tinted, rose-colored glasses and take a hard look at how the U.S. banking system got into the mess it’s in today.”
“The new edition brings the reader up-to-date with the bank runs and second, third and fourth largest bank failures in U.S. history that occurred in the spring of last year, along with four new chapters: “Too Fragile Still,” “Bailouts and Central Banks,” “Bailouts Forever,” and “Above the Law?”
