Anat Admati

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 ([b:Fool's Gold|6442950|Fool's Gold|Gillian Tett|https://images.gr-assets.com/books/1347592162s/6442950.jpg|6632920]) or intense rage ([b:Freefall: Free Markets and the Sinking of the Global Economy|26812736|Freefall Free Markets and the Sinking of the Global Economy|Joseph E. Stiglitz|https://images.gr-assets.com/books/1443172499s/26812736.jpg|6774891]). I highly recommend both of the latter books, but was less impressed with [b:The Storm: The World Economic Crisis & What It Means|6533598|The Storm The World Economic Crisis & What It Means|Vince Cable|https://images.gr-assets.com/books/1328705702s/6533598.jpg|6725726] and [b:Crisis and Recovery: Ethics, Economics and Justice|8125161|Crisis and Recovery Ethics, Economics and Justice|Rowan Williams|https://images.gr-assets.com/books/1315685491s/8125161.jpg|12920809]. ‘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.… (more)

In short:

- The Bankers' New Clothes is a useful book in that it makes clearly the case for higher equity requirements for banks. This does seem a much more sensible path than separating ill-defined activities.

- The book does however fail to account for the difference between US and EU financial systems. As a consequence, significant costs of higher equity requirements are overlooked. The criticism of risk-weighted assets is unconvincing.

As a result, I do recommend writing this. But I also recommend to keep in mind that the author are less knowledgeable about the inner functions of the banking system and less clear-eyed than they think they are. For an European, the US centrism and EU-bashing gets irritating after a while.

Full review: http://bs-initiative.org/index.php/documents-de-travail/item/130-reaction-to-%E2...… (more)