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What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lac What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lack of reform, exposing them as invalid. Admati and Hellwig argue we can have a safer and healthier banking system without sacrificing any of the benefits of the system, and at essentially no cost to society. They show that banks are as fragile as they are not because they must be, but because they want to be--and they get away with it. Whereas this situation benefits bankers, it distorts the economy and exposes the public to unnecessary risks. Weak regulation and ineffective enforcement allowed the buildup of risks that ushered in the financial crisis of 2007-2009. Much can be done to create a better system and prevent crises. Yet the lessons from the crisis have not been learned. Admati and Hellwig seek to engage the broader public in the debate by cutting through the jargon of banking, clearing the fog of confusion, and presenting the issues in simple and accessible terms. The Bankers' New Clothes calls for ambitious reform and outlines specific and highly beneficial steps that can be taken immediately.


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What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lac What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lack of reform, exposing them as invalid. Admati and Hellwig argue we can have a safer and healthier banking system without sacrificing any of the benefits of the system, and at essentially no cost to society. They show that banks are as fragile as they are not because they must be, but because they want to be--and they get away with it. Whereas this situation benefits bankers, it distorts the economy and exposes the public to unnecessary risks. Weak regulation and ineffective enforcement allowed the buildup of risks that ushered in the financial crisis of 2007-2009. Much can be done to create a better system and prevent crises. Yet the lessons from the crisis have not been learned. Admati and Hellwig seek to engage the broader public in the debate by cutting through the jargon of banking, clearing the fog of confusion, and presenting the issues in simple and accessible terms. The Bankers' New Clothes calls for ambitious reform and outlines specific and highly beneficial steps that can be taken immediately.

30 review for The Bankers' New Clothes: Whats Wrong with Banking and What to Do about It

  1. 4 out of 5

    Breakingviews

    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 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.

  2. 4 out of 5

    Ian Robertson

    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 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.

  3. 5 out of 5

    Richard Thompson

    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 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.

  4. 5 out of 5

    Anna

    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 with 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.

  5. 4 out of 5

    Mark Walker

    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 ju 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.

  6. 4 out of 5

    Graham Clark

    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 advan 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.

  7. 5 out of 5

    Eugene Kernes

    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 p 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.

  8. 5 out of 5

    John Karrys

    This woman is an ultimate warrior and Jamie Dimon's worst nightmare. No one is to big to jail. Fantastic book. This woman is an ultimate warrior and Jamie Dimon's worst nightmare. No one is to big to jail. Fantastic book.

  9. 4 out of 5

    Prasanth Manthena

    Makes a very strong case that banks should be deleveraged and depend on equity just like other corporations

  10. 4 out of 5

    Jon

    By far the best book I've read on the global financial crisis. By far the best book I've read on the global financial crisis.

  11. 4 out of 5

    Thomas

    Focused to a fault. An excellent introductory text nonetheless.

  12. 5 out of 5

    Tim Strotman

    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 f 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.

  13. 4 out of 5

    Bighomer

    My only complaint is that it is quite repetitive. There is zero new information over the last three chapters, and even in the first ten chapters there is a lot of repetition. Basically, one could've thrown all the points the book makes in a three-slides powerpoint presentation. But that's a rude thing to say; in actuality the explanations are great (if a few too many analogies to movies and sports) and it's overall an easy but-good-read that explains past and current issues of banking and what to My only complaint is that it is quite repetitive. There is zero new information over the last three chapters, and even in the first ten chapters there is a lot of repetition. Basically, one could've thrown all the points the book makes in a three-slides powerpoint presentation. But that's a rude thing to say; in actuality the explanations are great (if a few too many analogies to movies and sports) and it's overall an easy but-good-read that explains past and current issues of banking and what to do about them.

  14. 4 out of 5

    Jason Q

    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 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!

  15. 4 out of 5

    محمد

    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 ma 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.

  16. 5 out of 5

    Nathaniel

    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.

  17. 4 out of 5

    Blake Jones

    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. 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.

  18. 4 out of 5

    Louis S-B

    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.

  19. 4 out of 5

    Colby

    4 stars, not 5, only because the authors took 400 pages to say, "[all] banks need more equity"; a necessary message oft shouted down by bankers and their ilk. To be fair, the authors start at the basics, and their insistent hammering on the distinction between banks' 'capital' and their 'reserves' may not be bad in this world of immediacy. Would make a superb text for Corporate Finance 101. 4 stars, not 5, only because the authors took 400 pages to say, "[all] banks need more equity"; a necessary message oft shouted down by bankers and their ilk. To be fair, the authors start at the basics, and their insistent hammering on the distinction between banks' 'capital' and their 'reserves' may not be bad in this world of immediacy. Would make a superb text for Corporate Finance 101.

  20. 5 out of 5

    Jim

    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.

  21. 4 out of 5

    Adam

    300 pages too long to present the message about the dangers of unregulated banking and current equity balance requirements.

  22. 4 out of 5

    Aion

    It’s an okay overview of the problems with modern banking, but for someone with advanced knowledge on the topic I found it very basic.

  23. 5 out of 5

    Zoran

    Interesting and thoughtful, but not very engaging book.

  24. 5 out of 5

    V.C. Remus

    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). 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).

  25. 5 out of 5

    Syed Ashrafulla

    This is a good book in describing the mechanics behind equity at a bank. The proposal of the authors is that banks should increase equity to about a quarter of total (i.e. not risk-weighted) assets. They provide good arguments but their goal is mainly to provide counter-arguments from those who desire high leveraging. Essentially the advantage of equity is to mitigate downside risk. As with any investment, mitigating downside risk means decreasing maximum upside. Their argument is that banks have This is a good book in describing the mechanics behind equity at a bank. The proposal of the authors is that banks should increase equity to about a quarter of total (i.e. not risk-weighted) assets. They provide good arguments but their goal is mainly to provide counter-arguments from those who desire high leveraging. Essentially the advantage of equity is to mitigate downside risk. As with any investment, mitigating downside risk means decreasing maximum upside. Their argument is that banks have gone after upside by pushing some of the downside risk onto taxpayers & depositors (think bailouts & bank holidays). Hence, their main response is to move that risk back onto banks. The consequences are obvious and not necessarily all bad: - banks, by holding earnings, decrease share price to better reflect banks' return-risk situation, - banks trim down riskier investments because they bear more of the risk, - banks trim down riskier loans for the same reason, - banks lose competitiveness with other countries that have laxer regulations, and many more. The book is worth a read to see those (and many more "consequencies") rebutted by the authors. In large part they are right: higher equity makes banks safer, and the cost to society is quite low. As far as I can tell, the biggest loss is that lower middle class & lower class people can't overextend their finances the way they did in the early 2000s (the really bad mortgages). That loss from a societal perspective is small because the downside risk is so high from financial overextension. The book does have some issues in that it doesn't appropriately consider secondary consequences. For example, it holds up contagion as an example of why current regulation was ill-advised in its attempt to be scientific. Their current proposal has secondary consequences too in that it can't handle financial engineering that well. It also still admits a relatively high likelihood of bailouts; in fact the authors punt the issue by saying that central bank bailouts are a prerequisite of any society. From a reading standpoint, you can get bogged down in their arguments sometimes so it's ok to skip paragraphs. Definitely skip footnotes too; I first read this while reading all the footnotes. That was a terrible mistake; in the second read, I skipped footnotes and was better for it. The book then has a bit of a "take this as a fact without question" vibe, but the footnotes really don't help that vibe anyway. It's still a good read and helps understand what it means to talk about equity & required return appropriately.

  26. 4 out of 5

    Sara

    Basle III is naked [Through my ratings, reviews and edits I'm providing intellectual property and labor to Amazon.com, Inc., listed on Nasdaq, which fully owns Goodreads.com and in 2013 posted revenues for $74 billion and $274 million profits. Intellectual property and labor require compensation. Amazon.com, Inc. is also requested to provide assurance that its employees and contractors' working conditions meet the highest health and safety standards at all the company's sites.] An antidote to ag Basle III is naked [Through my ratings, reviews and edits I'm providing intellectual property and labor to Amazon.com, Inc., listed on Nasdaq, which fully owns Goodreads.com and in 2013 posted revenues for $74 billion and $274 million profits. Intellectual property and labor require compensation. Amazon.com, Inc. is also requested to provide assurance that its employees and contractors' working conditions meet the highest health and safety standards at all the company's sites.] An antidote to agnotology, i.e. the art of promoting ignorance. Banking for dummies, or back to basics - and the effort the authors make to explain, clarify, exemplify, and then explain again is telling of the veneer of nonsense that wraps finance and stubbornly resists any attempt at cutting into it. The contradictions are all candidly exposed, but no suggestion is put forward as to their deep roots. And the main unanswered question is: why have political institutions reacted so mildly to a systemic crisis marked by shock waves and virulence of unprecedented brutality? What happened in the run-up to the crisis is that regulators - allegedly in search of the holy grail of the scientifically adjustable parameters - left banks free to play with a regulatory toy that gave them all sorts of gaming opportunities, as in practice control was delegated to banks themselves and privatized (Basle II accord). As an improvement on this situation (Basle III accord), after the crisis, 'stress tests' - always run by the banks themselves - were added, and the minimal capitalization requirements were slightly increased, with plenty of time to comply (the deadline is 2019). To explain the scandal, the authors - in their orthodoxy - point in the direction of revolving doors, conflicts of interests and greed. A new book, Fragile by Design, promises to look farther than that.

  27. 5 out of 5

    A

    Using some pretty core principals of corporate finance, Admati and Hellwig cut through a lot of the muddle around bank regulations and make a pretty strong case for why banks need higher equity requirements. I was pretty impressed by their rather clear analysis and parsimonious proposal for dealing with bank risks, too big to fail, etc. It is a little surprising that this is only now getting a lot of traction in the public debate. The way Admati presents her arguments, the case for much higher b Using some pretty core principals of corporate finance, Admati and Hellwig cut through a lot of the muddle around bank regulations and make a pretty strong case for why banks need higher equity requirements. I was pretty impressed by their rather clear analysis and parsimonious proposal for dealing with bank risks, too big to fail, etc. It is a little surprising that this is only now getting a lot of traction in the public debate. The way Admati presents her arguments, the case for much higher bank equity requirements appears pretty clear cut. I'm still thinking through the arguments in this book a bit, and trying to seek out any credible counter arguments. I will revise my rating down a lot if I find out that the empirical/theoretical debates about bank equity levels are not a cut and dry as they suggest. But, I've yet to find any particularly strong counter arguments. I would fault Admati and Hellwig a little for two things. They reduce everything that happened in the financial crisis to bank equity and "too big to fail." I think there is a strong case for there being other variables that were also at work in the crisis, and other reforms (some of which are being implemented) that are necessary to protect against a repeat of such a crisis. For example, the more transparent trading of derivatives, measures to deal with counterparty risk, all seem also useful, and not necessary contrary to Hellwig and Admati's argument. Also, I'm not sure they get their analysis of incentives for policy makers quite right. Anyway, the core of the book is pretty interesting and penetrating, and it has made me think. I hope to see more debate on this topic in the future.

  28. 5 out of 5

    David

    This book is a decent book if one does not know how a "bank" works. Rather, how an individual's finance or company's or even a bank or nation works just about the same. The theme of this book is simple: reduce the debt position, and increase equity position, period. Authors are using simple personal house mortgage finance to repeatedly guiding us what kind of tricks and lies banks' stockholders, bondholders are using in order to disguise their tracks of over-finance, or simply reckless use of ou This book is a decent book if one does not know how a "bank" works. Rather, how an individual's finance or company's or even a bank or nation works just about the same. The theme of this book is simple: reduce the debt position, and increase equity position, period. Authors are using simple personal house mortgage finance to repeatedly guiding us what kind of tricks and lies banks' stockholders, bondholders are using in order to disguise their tracks of over-finance, or simply reckless use of our savings. On top of this, how an irresponsible government combining with lobbyists to loot our money to save these banks, so the executives, Wallstreet's scoundrel can continue to be motivated by high commission to play our money in daily Russian roulettes. Authors stop short of blasting American most evil financial investment bank such as GS, Lehman, Bear Stearns, etc for their inter knitted relationship with the government top brass. Authors stop short of calling TAARP, LTRO as the worst financial salvage weapons..stop short of calling QE the worst salvage scheme ever developed by their own American government (adding Japan as well)..It is a good read..but Authors did not mention that Greenspan was the culprits to drive the subprime blow out due to his prior reckless LTCM record as well as reckless interests rate decrease during the "roaring 90s".. if one wants to know about the reasons bank's debt must be reduced to safe themselves, this will be a good book. But for those who want to know how the world works driven by these evil bankers and politicians, this book won't tell you much.

  29. 4 out of 5

    Mike

    This book makes an important argument for the importance of increasing equity requirements for financial firms. The authors argue a wide range of interrelated positive outcomes that ensue from requiring more real equity (not just assets, or risk-weighted assets, or other "gameable" substitutes). The argument is really rooted in what is a common sense sort of perspective that with more "skin in the game" financial institutions will behave more business-like. Current regulations including Basel II This book makes an important argument for the importance of increasing equity requirements for financial firms. The authors argue a wide range of interrelated positive outcomes that ensue from requiring more real equity (not just assets, or risk-weighted assets, or other "gameable" substitutes). The argument is really rooted in what is a common sense sort of perspective that with more "skin in the game" financial institutions will behave more business-like. Current regulations including Basel III, in the authors' perspective, encourage banks (and other financial institutions) to be heavily leveraged and to behave like a highly indebted player who can play "heads I win, tails the taxpayer loses" with their risk decisions. This effects everything from preferring high risk "exotic" investments to simple business and mortgage lending, to over-incenting high-risk and short-term business practices among employees. At times, the book can seem like the same argument is being repeated numerous times and appears a bit pedantic. However, it is often true with the repetition of their argument that, in fact, they are demonstrating another angle from which low equity requirements and high leveraging impact bank behaviors. Overall, a very important book, with lots of ways in which it elucidates narrower concerns about the recent financial crisis and provides an inclusive perspective from which to see related problems.

  30. 4 out of 5

    Melissa

    This book was dry, and even though I work in banking and have more than a casual interest, I still struggled to get through it. I think the length worked against it, and a more direct approach with fewer examples would have been better. That being said, the author makes a very compelling argument that banks need more capital in order to prevent another massive banking crisis. The main premise is that the BASEL III capital requirements are too low. The first 2/3 of the book is a detailed explanat This book was dry, and even though I work in banking and have more than a casual interest, I still struggled to get through it. I think the length worked against it, and a more direct approach with fewer examples would have been better. That being said, the author makes a very compelling argument that banks need more capital in order to prevent another massive banking crisis. The main premise is that the BASEL III capital requirements are too low. The first 2/3 of the book is a detailed explanation of how banking systems work, which is valuable and necessary to put Basel III in context, but I wish the author had tackled the regulation earlier on. The book is a combination of technical jargon and simplified examples, and I would have appreciated more detailed discussion on the specifics of the regulation. The author repeatedly refers to banks having as little as 3% capital under BASEL III, but never really elaborate on that specific scenario. The last two chapters summarize the argument and I liked them best. The footnotes are NUMEROUS. At first I enjoyed reading them because they add a lot of color and context, but eventually I just got annoyed that I had to flip to them every two sentences. I wish they had been reduced in number and integrated into the text.

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