Book launch tackles big issues

Banks should be required to hold equity levels of 20-30% against all lending.

That is the recommendation of Anat R Admati, George G.C. Parker Professor of Finance and Economics at the Stanford Graduate School of Business, and Martin Hellwig, Director of the Max Planck Institute for Research on Collective Goods.

The co-authors were speaking at London Business School (LBS) at the launch the latest edition of their highly acclaimed book, The Bankers' New Clothes: What's Wrong with Banking and What to Do About It.

Professor Hellwig drew on the recent example of the failures at Silicon Valley Bank (SVB) and Credit Suisse to highlight the importance of sufficient equity levels.

“With more equity, (SVB) would’ve run afoul of these requirements much earlier and the supervisors would have been forced to step in, and that’s also true for Credit Suisse,” Professor Hellwig said.

The authors outlined key chapters and discussed a wide range of topics, including Contingent Convertibles (CoCos), whether banks are considered above the law and banks considered ‘too big to fail’.

Professor Admati also spoke about the importance of central banks and how, despite their significance, they remain poorly understood and mysterious to most people.

“They step in increasingly to save …and to hide the weakness of the system and their own or other regulators’ failure to regulate,” she said.

Both authors explained their concern about banks and other powerful corporations undermining democracy and the rule of law.

“Their impact has increased since the financial crisis,” Professor Admati argued.

The academics were joined in discussion by Richard Portes, Professor of Economics at London Business School, and Martin Sandbu, European economics commentator at the Financial Times.

The event was hosted by the LBS AQR Asset Management Institute.