The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It

By Anat R. Admati, Martin Hellwig
Princeton University Press, Princeton, 2013

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.

Selected Editorial Reviews
At last! Two eminent economists explain in plain English what is wrong with banks and what needs to be done to make them safer.
Mervyn King, former governor of the Bank of England
I like this book. The Bankers’ New Clothes explains in plain language why banking reform is still incomplete, contrary to what lobbyists, politicians, and even some regulators tell us.
Paul Volcker, former chairman of the U.S. Federal Reserve and the U.S. Economic Recovery Advisory Board
This entertaining book is an accessible exposé of the myths that financial firms use to perpetuate the advantages they get from government guaranties of their debt. A must-read for concerned citizens, The Bankers’ New Clothes should be studied and memorized by lawmakers and regulators so they won’t be duped by these false claims in the future.
Eugene F. Fama, University of Chicago
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