Anat Admati, Juliane Begenau, Mark Bils, Michael Boskin, Joe Grundfest, John Gunn, Bob Hall, Eric Hanushek, Simon Hilpert, Chad Jones, Pete Klenow, Pablo Kurlat, Luigi Paciello, Josh Rauh, Ken Scott, John Shoven, Emily Warren, Ian Wright
Anat Admati, professor of finance at the Stanford Graduate School of Business, discussed her recent book “The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It,” co-authored with Martin Hellwig.
Admati began by outlining the current issues with the banking system, including the fragility of the financial system, the unnecessary risks taken by banking management that the public then bears, the distortions to the real economy due to the system’s structure, and lack of regulation leading to the banking sector not performing many roles that would enhance the economy. She explained some of the causes of these issues, which included increased banking sector leverage (indebtedness), the current and increasing interconnectedness of the financial system, government subsidies that pervert incentives, and a lack of governance.
Admati then discussed current policy discussions and proposed some potential solutions to the issues above, primarily focusing on the argument that reducing leverage (indebtedness) relative to capital would mitigate many of the problems with the banking system. She claimed that while better resolution is essential, it is difficult to implement across borders. Additionally, while better regulations such as ring fencing, Glass-Steagall or the Volcker Rule may help, the complexity of the system, the lack of credible commitments by policy makers, and interconnectedness of the system make it difficult for these particular regulations alone to eliminate the problems in the banking sector. However, Admati argued that increased capital requirements would lead to a reduced likelihood of distress or failure, reduced contagion effects and spillovers, reduce too-big-to-fail subsidies, a shift of risk from taxpayers to investors, reduced likelihood of runs, and no interference with any banking activity (given that non-banks generally have more than 30% equity/debt ratios and that the banking sector used to have less government safety nets and subsidies than it does now). Admati concluded that changing the corporate tax code, increasing transparency, and increasing capital requirements should increase welfare in the economy by solving many banking sector problems.