Anat Admati makes a compelling case for effective financial reform in a recent New York Times op-ed entitled “We’re All Still Hostages to the Big Banks.” Admati, a leading voice for meaningful regulation of the banking sector, makes the following key points:
- “Nearly five years after the bankruptcy of Lehman Brothers touched off a global financial crisis, we are no safer.”
- “From Washington to Berlin, banking lobbyists have blocked essential reforms at every turn.”
- Our leaders are complicit, to a “shameful” degree, in this failure.
- Banks are far more leveraged than other major corporations, often well in excess of 90 percent of their assets, which places both them and the financial system in danger.
- Current laws and regulatory proposals fail to address that problem. (Even the biggest banks could still borrow up to 95 percent of their assets’ worth.)
- That means that even a relatively “tiny” loss of as little as 2 percent of a financial institution’s perceived asset value could trigger a bank run, heightening the risk of a systemic failure.
As Admati rightfully notes, the global financial system will not be safe until banks are forced to rely much more heavily on shareholder and investor money instead of customer funds for their loans and investments.
As a professor of finance and economics at the Stanford Graduate School of Business, Admati may seem like an unlikely reformer. But the people who know the system are often those who understand just how seriously flawed it has become. (Admati is the co-author of The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It.)
“Dodd-Frank was supposed to spell the end to all bailouts,” write Admati. “Don’t count on it.” Her op-ed is well worth reading in full.