Seeing through "the banker's new clothes": Anat Admati at TEDxStanford

Anat R. Admati holds a bachelor's degree from Hebrew University in Jerusalem and a doctorate from Yale University, and is a professor of finance and economics at the Stanford Graduate School of Business. Her recent research has focused on corporate governance and banking. She is the co-author of The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. The book and many commentaries expose the continued failure by policymakers to protect the public and reduce the harm and distortions from a reckless financial system. Admati believes that explaining the issues to a broad audience is essential for bringing about policy change.
In the spirit of ideas worth spreading, TEDx is a program of local, self-organized events that bring people together to share a TED-like experience. At a TEDx event, TEDTalks video and live speakers combine to spark deep discussion and connection in a small group. These local, self-organized events are branded TEDx, where x = independently organized TED event. The TED Conference provides general guidance for the TEDx program, but individual TEDx events are self-organized.* (*Subject to certain rules and regulations)

[@preetishramasawmy296]

Amazing Ted talk- really helpful to get an insight into the inner workings of the system

[@RaAM404]

They should show this at the next senate session.

[@muskduh]

Thanks for the video presentation!

[@Riverdale270]

Banks DO NOT lend out their deposits, they DO NOT lend out their capital. Bank create fresh new never-exist-before deposits when they agree to lend out money, and new money is created as such. In other words, when a bank agrees to a loan, both an asset (the loan) and a liability (the deposits) are created out of nothing. This is why banks are highly leveraged compared to other firms. Banks by definition create debt (create deposits) when they do business (create assets). Normal businesses don't work like this. Because banks create ALL digital money, they are of course HUGE. And so to make them hold extra equity, the investment preferences of the people in an economy need to change in a BIG BIG way. There is no way you can create a shift from deposits to equity without changing the investment preferences of the majority of investors.

[@yuuka926]

This video is slightly misleading.

[@astraeashaw7538]

HOW is it "misleading"???

[@yuuka926]

Astraea Shaw She refers to the tier 1 capital requirements of banks but but infers these are the debt to equity ratios. This is not the same thing. Companies outside of banking are not required to hold any tier 1 capital.

[@yuuka926]

If you compare American banks to other bluechips their debt to equity levels are actually low. Also if you look at the historical the level of debt it significantly fallen over the years across the banking industry. Don't get me wrong, I agree with a lot of things she said but I think by simplifying the issue she has given an incorrect perception of what is going on.

[@Rubens_991]

"level of debt it significantly fallen over the years across the banking industry" because of regulation aka Basel II-III !

[@GregComlish]

C'mon. This woman is a professor. She knows that there are critical differences between banks and other companies. She's playing dumb to make a simplistic point to simple people. If I deposit a billion dollars in a community bank then it's going to swamp that bank's debt-equity ratio. But do you really believe that your local bank is in worse shape financially because somebody deposited a lot of money into it? Do you really think you are making your local bank healthier when you withdraw all your money from them? Because everytime you withdraw your money, you improve your bank's debt-equity ratio.
Let me put it another way: if Admati hates banks for having low capital requirements, then she must really hate Credit Unions which are prohibited *by law* from raising capital. But here's the fact: Credit Unions are not, and have never been, a problem for the American economy. Which is to say, a lack of equity is not intrinsically evil.
Let's take Admati's argument to its logical conclusion and require 100% of the banks capital to come from equity. What does this mean? It means that banks can no longer take deposits. If consumers want to put their money into a bank, they would have to buy equity in the bank. Consumers would be forced to be shareholders instead of creditors, which is to say they would have no protection of any kind in case of insolvency. Admati's prescription would actually force consumers to take on much more risk while freeing banks of the heavy restrictions and oversight that comes with managing depositors funds.
Ok that's enough thought experiments. Now let's get back to basics: The purpose of a bank is to take in deposits and loan them out, giving its depositors some return and keeping the rest. That's not a sinister plot, that's just what banks do. Unlike most companies, banks are heavily restricted in what they can do with depositors money and they have several regulators watching them like a hawk. The correct way to determine a bank's capital requirements is by comparing their capitalization to the risk that they are undertaking. If a bank is making risky bets then it should have a lot more capital and if it is playing it safe then it can get by with less. This is how it should be: Regulators should require that risky banks have more equity than safe banks. But if you raise capital requirements on all banks equally, regardless of the risk they've undertaken, then what you're really doing is punishing the safe banks. This perversely incentives banks to undertake more risks and makes the financial system less stable.

[@akshatgoel7579]

The thought experiment you propose is false - taking Admati's argument to the logical conclusion you take it to dissolves the argument itself. The book she wrote and what she's argued is that there is an optimal level of equity requirement that banks should have - and that the current requirement is lower than the optimal. She is not arguing that more equity is always good, she's just saying that we are below the optimal right now.
Your point about credit unions is also misleading, because Admati does not uniformly 'hate' all low capital requirements. She hates low capital requirements for institutions who can use finance risky projects with debt. Credit unions in the United States are, on average, too small to be compared to the kinds of banks Admati is implicitly talking about. Because they are small, they tend not to have the resources to undertake risky projects (with big potential downsides). If you control for size, you will find that larger credit unions did not, in fact, weather the crisis as well as you claim.
The last point makes sense: but the problem is that you are assuming a world without financial frictions. In reality, banks have private information about the projects they want to undertake and the investments they want to make with the financing they get, and no matter how closely they are watched by regulators, most tend to find a way to take more risk than they should anyway. That's the problem of moral hazard. If there were simple ways to see which banks were taking unnecessary risks, there wouldn't be a problem.

[@cmacblue42]

This is the worst TED talk ever... how is she a professor at Stanford? Almost the entire talk revolved around a single data point with absolutely no context. I would never expect such a lack of curiosity from a Stanford professor, let alone from a talk who's crown metaphor is Alice's "rabbit hole." First off, it is impossible to compare companies like Google to a bank, especially on a balance sheet basis. GAAP accounting muddles everything so you actually have to go in to examine the quality, liquidity, and general nature of assets and liabilities on the balance sheet. Most regular companies in the world actually do really risky stuff (they invest in things like R&D, oil & gas exploration, marketing, expansion.... basically their ability to invent new things and/or be able to sell it better than everyone else). A bunch of them don't even make a profit. Compare that to financial companies, who hold generally liquid fixed income securities, short term investments, and a ton of cash. Now look at the difference in shape of liabilities. Whereas normal corporates have very few short term borrowings and a large amount of long term borrowings, banks are the complete reverse. Herein lies the essential function of the banking system: putting all the short term money in our economy to work by lending it long term to people who want to invest in things like R&D, expansion, a car, a home, etc. That is the risk they take and that is what they get paid to do, and this risk is substantially smaller than the risks being taken by the LinkedIns or the DuPonts or the Chipotles of the world. So yes, they can have less equity than some guy buying one house or your run-of-the-mill corporation. And beyond this lack of understanding of basic business and accounting, she manages to close her speech with a massive ad hominem attack on the ethics of basically everyone who would disagree with her. She's basically saying "if you don't understand and agree with what I'm saying, you are corrupt and/or morally bankrupt, and so you should agree with my underlying thesis." Not only is this a ridiculous logical fallacy, it is academically irresponsible and offensive.

[@YouTouchinside]

Which one is the bank paying you?

[@pritamtamang6203]

cmacblue42 Ok expert.. so you think that the perverse culture of borrowing and lending that a decadent consumerist society like ours and obscene institutions like banks promote and glorify, are perfectly reasonable? You must be a genius.

[@matiascova]

She is an extremely good economist with many influential publications, so yes she is aware of the nuances of banking accounting. Now, does those nuances invalidate her point? Not at all, extreme leverage is a problem, are you really going to deny that? What she is saying about the fallacy of considering tighter leverage regulation with leaving cash aside is true. The agency problems of banks not acting in the interest of their creditors is true. If you have actual counter arguments please state those clearly.

[@spikeyspike79]

show some respect. what is the reason behind you not understanding this obvious fact?