"The point, as Anat Admati and Martin Hellwig put it in their crucial new book The Bankers’ New Clothes, is that 'Although risk and losses from excessive market speculations are bigger media events, traditional lending can be just as risky and can lead to very large losses.' The rhetoric of 'plain vanilla banking' makes it sound as if making traditional loans is relatively risk-free. Yet historically, it’s traditional lending gone wrong that’s led to financial crises. [...] even simple, open banks are, as history shows, risky. The key is ensuring that banks are more resilient to the possibility of failure, and that they bear more of their own risks, rather than sloughing them off on the rest of us. What does this mean in practice? Well, the biggest issue with the way banks work these days is that they’re funded almost entirely by debt—in other words, nearly all of the money they lend out is itself borrowed. This has a number of negative consequences. First, it encourages recklessness, since the banks are in effect gambling with other people’s money. Second, it means that banks have very little cushion if they make mistakes—even relatively small declines in the value of their loans can put them on the verge of technical insolvency. And since some of the biggest holders of bank debt are other banks, the heavy reliance on borrowing means that if one institution gets into trouble, its problems can easily cascade through the system, weakening other banks as well. As it happens, though, there’s a way to change this—as Admati and Hellwig persuasively argue, we should simply require banks to hold more equity capital, and less debt."

"The Bankers’ New Clothes is a lucid exposition of the intellectual falsehoods deployed by banks to justify the ways in which they went about growing their business beyond any reasonable assessment of risk in the run-up to the crisis of 2008 and which they continue to peddle today. Admati and Hellwig cut through the debates about whether it was too little or too much regulation that was to blame, whether central banks could and should have acted faster, and the rights and wrongs of securitisation or separating commercial and investment banking, and go to the heart of the matter. Western banks, they argue, borrowed far too much with far too little equity in their balance sheets to act as a buffer if things went wrong in any part of their business [...] Admati’s and Hellwig’s constant refrain is that banks are no different from any other organisation or individual. [...] Admati and Hellwig challenge all the bankers’ justifications for their behaviour."

"Ms. Admati and Mr. Hellwig do not offer a detailed regulatory plan. They don't even advocate a precise number for bank capital [...] But this apparent omission, too, is a strength. A long, detailed regulatory proposal would simply distract us from the clear, central argument of The Bankers' New Clothes: More capital and less debt, especially short-term debt, equals fewer crises, and common contrary arguments are nonsense. More capital would be far more effective at preventing crises than the tens of thousands of pages of Dodd-Frank regulations and its army of regulators, burrowed deep in the financial system, on a hopeless quest to keep highly leveraged and subsidized too-big-to-fail banks from taking too much risk. Once the rest of us accept this central idea, the details fill in naturally."