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.