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March 25, 2013

Why bankers are intellectually naked

“The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It”, by Anat Admati and Martin Hellwig, Princeton, RRP £19.95, RRP $29.95

The UK’s Independent Commission on Banking, of which I was a member, made a modest proposal: the proportion of the balance sheet of UK retail banks that has to be funded by equity, instead of debt, should be raised to 4 per cent. This would be just a percentage point above the figure suggested by the Basel Committee on Banking Supervision. The government rejected this, because of lobbying by the banks.

Why might even so tiny an increase in the equity-funded proportion of the balance sheet be objectionable? The answer is that what is small to everybody else is huge to bankers. To them, a one-third increase in equity means a 25 per cent decline in return on equity. To bankers, the ICB’s tiny step was a big reduction in prospective returns and so in their own rewards.

If you think that running banks with so little loss-absorbing equity is crazy, you are right. This book shows you why you are right. It is the most important to emerge from the crisis.”


Read full Financial Times review of Anat Admati’s book here

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