On my bookshelf there is a hardback copy of the original, 2013 version of this book. I bought this when it was released as the reviews were compelling and the story it told was well argued, persuasive and important. At that time, many books were being released examining the banking and financial system. This followed the global financial crisis of 2007-2008 but its effects lingered noticeably for several years afterwards.

The first edition of this book stood out because of its clear and insistent message. Banks were massively undercapitalised. Further, reforms being proposed were unlikely to improve things greatly. All the arguments bankers gave against forcing an increase in the amount of capital on their balance sheets were and are bogus (see chapter seven “Is Equity Expensive?” for a full explanation).

Words are not minced. For example, chapter 11 discusses the agreement under Basel III in 2010 to set a minimum leverage ratio of 3 percent. The assessment of Amati and Hellwig is blunt “If this number looks outrageously low, it is because the number is outrageously low.” (p.177 in both the first and updated editions). The italicisation of the word “is” comes from the text. The opinion of the CEO of Wells Fargo bank that deposits by Wells Fargo with the Federal Reserve are a loan from Wells Fargo to Federal Reserve while also maintaining that customers’ deposits at the bank are not debt is described as “absurd” (p. 279). Total Loss Absorbing Capital (TLAC) is “not an innovation at all but a marketing trick.” and “a rhetorical sleight of hand” (p.293). Buy and read this book. You’ll find plenty more.

That this book needed to be updated and reissued is a sign of failure in the regulation of banking and finance. The risks of another major financial crisis cannot be ignored. Indeed, the 2023 failures and bailouts of Silicon Valley Bank, Sovereign Bank, Signature Bank and Credit Suisse underlie the very real risks that continue in banking and financial markets.

Don’t think for a moment that this is purely a US problem. Of relevance to this Society, largely based in the UK, for which this review is written, look to page 234 in Chapter 14 titled “Too Fragile Still”. The comment is made about the UK that in the years following the global financial crisis “Proponents of stricter financial regulation left or were removed from positions relevant to banking regulation and supervision.” Don’t miss footnotes 15 and 16 from this page either. As noted earlier, words are not minced.

The focus on the fragility of the financial system is one key and vitally important message of the book - both in the first and updated editions. However, there is arguably a more important message.

In his glowing review of the first edition ( see https://johnhcochrane.blogspot.com/2013/03/the-bankers-new-clothes-review.html ), Prof John Cochrane in 2013 argued that that the chapter on “The Politics of Banking” was too short. It would appear that Profs Admati and Hellwig agree. In the preface to this expanded edition, the authors write “Since the book came out in early 2013 we have kept advocating for better rules, but the politics of banking continue to prevent progress.” (p. ix) But it is arguably worse than this. The preface also notes the continuance of rule breaking by bankers and financiers. They write “In this edition we discuss why violations of rules could have become a normal way of doing business in banks” (p. xi). Read that again. A “normal” way of doing business. What did I write earlier about not mincing words?

The intersection of continued fragility in banking and finance systems, cronyism in setting regulation and ineffective enforcement of these regulations carries great risks not only to finance itself but to democratic systems. “The decade since this book first came out leaves us even more alarmed by the state of our democracies in dealing with powerful corporations and their leaders. “ ( p. xii). This short 2017 video ( https://cepr.org/voxeu/video/economic-narratives ) of Prof Admati from the Centre for Economic Policy Research makes the same point in succinct style. Importantly, it is very critical of the way that economists do not sufficiently question the assumptions behind their models and the role of lobbying in economic policy. “I view economists as potentially part of the problem but also potentially part of the solution.”

The authors are not alone. Back in 2014 the presidential address of the American Finance Association by Luigi Zingales made similar points ( see here https://www.nber.org/system/files/working_papers/w20894/w20894.pdf for a non-gated version ). That address argues “the benefits of finance are inflated” by finance academics. Also, finance academics should use “research and our teaching to curb the rent seeking dimension of finance”. This discussion is carried to wider aspects in Prof Zingales’ 2017 paper “Towards a Political Theory of the Firm” ( see https://www.aeaweb.org/articles?id=10.1257/jep.31.3.113 ).

That this book needed to be re-issued, with the original 13 chapters unchanged and another four added is disturbing. And as if by clockwork, the relevance of the book is reinforced by comments in February this year from the current CEO of UBS, Sergio Ermotti. He is quoted as saying that more capital is not needed to make the banking system (or at least UBS) safer. This comes only ten months after the implosion of Credit Suisse and its emergency takeover by UBS. By the way, don’t forget that UBS almost failed in the 2008 financial crisis due to its excessive exposure to US real estate funds and derivative markets. It needed to be rescued by the Swiss central bank. Ermotti is quoted in this Reuters report (https://www.reuters.com/business/finance/ubs-ceo-says-more-capital-not-way-make-it-safer-2024-02-06/ ) saying that “no expert is saying that more capital is necessary”. Someone should introduce Mr Ermotti to Profs Admati and Hellwig.

I do have a few quibbles. The description of the money creation process in chapter 15 is standard fare. It may not give enough recognition to the role of commercial banks in the money creation process. Arguably this would heighten the fragility risks raised by the authors. Also the discussion of the LIBOR fixing scandal does not touch on the emerging but as yet unconfirmed role of regulators in that mess. Some background on this is available in this May 2023 BBC report https://www.bbc.co.uk/news/business-65635243 highlighting the work of Andrew Verity.

Don’t let these quibbles put you off. Do buy the book. Do read it. Do be worried. There is much work to be done by the profession to avoid not only further financial troubles but also to preserve the legitimacy of the relationship between business, the state, and the people.