Stability or growth?
This is the trade off we’re always presented with in financial reform. But we’re being offered a false choice, Anat Admati says.
On the first episode of INET’s new video series, “New Economic Thinking with Rob Johnson,” Admati speaks about her book, The Bankers New Clothes, and explains how banks can be more stable and still productive.
She offers a simple solution: increase the amount of equity funding banks are required to use. In a simple analogy, she says that the risk from overleveraging is like pollution, and that regulation should aim to reduce the pollution in the system, just like we do with the environment. Debunking the myths banks offer in response, she explains how this solution will prevent over-borrowing, help reduce taxpayer subsidies for overleveraging by so-called too big to fail banks, and still allow banks to lend and grow.
Throughout, she explains the politics and economics of banking in clear, straightforward language, challenging the obfuscations and half-truths that litter the debate. The economics profession, she says, suffers from” great ignorance about the forces making the financial sector move.” Elevating the discussion on bank regulation, her research shows why the new banking regulations that have emerged since the financial crisis aren’t nearly enough to ensure a safe financial system. On Basel III’s higher risk-weighted capital requirements she says, “tripling almost nothing doesn’t get you very far.”
And on banks threatening that her proposals would decrease lending, she notes that banks are already not lending or passing on to borrowers the implicit taxpayer subsidies they receive. “If you’re already on strike, the contingency of a strike is not a threat,” Rob Johnson jokes.
The emperor of banking is naked, as Admati shows. And it’s time to get him some real clothes.
For more from Anat Admati, tune in to INET’s Changing of the Guard? conference in Hong Kong from April 4-6. She will participate in a panel on “Financial Stability and Regulatory Design” along with INET advisory board member Simon Johnson, INET grantee Katharina Pistor, and others.
Comments
Capital requirements without transparency are dangerous as they present a false picture of the health of the bank.
What is important is not a bank's leverage, but the risk it is taking.
The only way to know how much risk a bank is taking is if it is required to provide ultra transparency and disclose on an ongoing basis its current global asset, liability and off-balance sheet exposure details. With this information, market participants, including banking competitors, can assess the risk a bank is taking.
One of the benefits of requiring ultra transparency is that it ends proprietary trading by banks. Just look at the effort that JP Morgan put into not letting anyone know about its "London Whale Trade" for fear that market participants would trade against it.
Outstanding interview and information as always from INET with Rob Johnson.
Between Anat Admati's and Janine Wedel's research there really is not much to add to the recovery and reform recipe. In that order recovery and then reform. Throw in a little bit of Joseph Stiglitz inequality awareness economics and Paul Krugman Keynesian activist economics and you have the perfect mix :-)
I hope this video gets 10 million views on youtube. Just put something like ''Paris Hilton make up tutorial'' or ''Justin Bieber loves economics'' :-) in the video title and description and you will get the many views this video deserves.
You make a good point Richard. What doe capital mean unless we can measure the value of assets and liabilities.
Having said that. More capital is a cushion against externalities when unforeseen events occur. Both leverage and transparency are important in my eyes.
Anat's focus adds momentum to cultivating bankers who can be depositors' loyal agents, making them easier to regulate, and their accountability easier as "small enough to succeed."
Rob's informed interviewer style is wonderfully refreshing in pushing discussion beyond hand wringing, onto considering necessary elements for new banking paradigms.
a great contribution to the understanding of how we got into this quagmire and why society must demand a change to a financial system whose primary objective is the wellbeing of society.
I got about 5 minutes in before switching to Amazon.co.uk and ordering the book.
Funny thing is, as an employee of a small bank, it seems to me the only reason they get it wrong from time to time is because, at the end of the day, there's no one to turn to for reliable macroeconomic guidance...(leadership or predictive)...and even if there was, the culture isn't in place to offer flexibility to such top-down direction. (It's a fully different kettle of fish at the large banks though...and I look forward to their further demise)
ockay !
“The Bankers’ New Clothes” is a great book, though I think “The Regulators’ New Clothes” would have been a better title.
But, that said in one passage they write “Whatever merits of stating equity requirements relative to risk-weighted assets may be in theory, in practice…”
And my problem for many years now is that I have not even been able to find anything that I would include within the “Whatever merits”.
Are there any finance professors out there willing to help?
http://subprimeregulations.blogspot.com/2013/03/dear-finance-professors-...
Post new comment