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March 5, 2013

Higher Bank Equity Is in the Public Interest

In their important new book, “The Bankers’ New Clothes,” Anat Admati and Martin Hellwig challenge a cherished belief of people who run big banks: Equity is “expensive” and requiring banks to fund themselves with more equity (relative to their debts) will somehow slow the economy.

This is what we hear from top executives as their central argument in the pushback against financial reforms. Jamie Dimon, the chief executive officer of JPMorgan Chase & Co., for example, suggested last week: “I think all banks will have too much capital in two and a half years. And they’re not going to know what to do with it.”

Admati, a professor at Stanford University, and Hellwig, a director at the Max Planck Institute in Bonn, are finance experts. Their book, excerpts of which were published by Bloomberg View, dissects the bankers’ claims — along with many of Dimon’s public statements — in meticulous and often humorous detail.

Their bottom line is simple: The people who run banks will always want to have less equity, because this enables them to get more upside when times are good, and they can rely on various forms of government downside support when decisions go wrong. It is very expensive for the rest of us if banks fund themselves with so much debt and so little equity, because this creates a fragile and distorted financial system that doesn’t provide reliable support to the economy.”

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Read Simon Johnson’s full Bloomberg View review here

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