This morning I had the pleasure of attending a breakfast debate hosted by Prospect for Anat Admati, co-author of the brilliant The Bankers’ New Clothes. The book has a clear, simple message: banks should be required to behave like normal businesses, and invest their own funds in projects with a good (risk-adjusted) return. They should not be subsidised to borrow money to invest in risky trading activities. “What is special about banks is what they get away with,” Admati says. The mechanism for moving from our world of zombie banks that can still bring down the whole economy and are still receiving massive taxpayer subsidies to a world of viable banks that finance the real economy is to require them to hold much, much more equity on the liabilities side of their balance sheet, moving towards that by not paying dividends for the foreseeable future.
The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It
The book is terrific, and if you don’t want to read a whole book, its website has a short myth-buster addressing the most frequent objections to the proposals ( http://bankersnewclothes.com/wp-content/uploads/2013/06/parade-continues-June-3.pdf). For of course bankers object to being told their industry harms the economy and is not commercially viable without government subsidy. Many people – including both politicians and many bankers – don’t understand the issues. There’s a lot of jargon and few people want to look stupid by admitting they don’t understand.
The meeting this morning split between bankers and economists. I think all economists agree on the need for banks to be much better-capitalised. This includes a senior economist at one of the UK’s biggest banks, who recently told me so then pleaded with me never to reveal their identity. However, this has little political traction. Bankers are confident chaps who talk a good (confusing) game and donate funds. The GDP figures greatly overstate the contribution of banks to the economy (see my forthcoming book, or Banking Across Boundaries by Brett Christophers). I think the best practical path in the short term is to encourage regulators and politicians to enable new entry into financial services. After all, only 3% of banks’ lending in the UK goes to business, and if start-ups including P2P and private equity can eat into that, it will be even clearer that the banks we have are not socially useful. If they are, they can prove it by raising equity and reducing their lethally dangerous leverage.