“What’s Wrong with Banking and Why?”
A highly anticipated book event took place on October 10, 2024, at Goethe University Frankfurt, organized by the Center for Advanced Studies on the Foundations of Law and Finance (LawFin) in collaboration with the Institute for Monetary and Financial Stability (IMFS) and the Leibniz Institute for Financial Research SAFE. The authors of the book, two of the foremost experts on financial reform, Anat R. Admati, professor at Stanford Graduate School of Business, and Martin Hellwig, Director emeritus of the Max Planck Institute for Research on Collective Goods, presented a new expanded edition of The Bankers’ New Clothes, which was published in 2013.
In their welcome Rainer Haselmann and Tobias Tröger, professors at Goethe University’s House of Finance and directors of the LawFin-Center, emphasized the Center’s mission to foster cutting-edge interdisciplinary research on finance, law, and regulation and to build the bridge to policymakers and supervisors who have the task of securing the stability of the global financial system.
The authors, renowned for their cross-disciplinary insights on finance, regulation, and policy, focussed their keynote, titled “What’s Wrong with Banking and Why?”, on the question of why the banking sector remains perilously unstable despite the promises of reform following the global financial crisis of 2008. Admati opened the lecture with a sharp critique of the current banking system and pointed to the “false sense of security” many have had since the crisis. She emphasized how recent bank failures underscore the fundamental dangers that still lurk within the financial industry. These failures, she argued, expose the inadequacy of existing regulations and the harmful complacency of both policymakers and the public. Admati stressed that while some believe the system has been reformed, the fundamental risks remain, and the dominance of financial institutions continues to pose a threat not only to financial stability but also to democracy. Martin Hellwig outlined the technical shortcomings of current banking practices. He dismantled the pervasive notion that banks must operate with dangerously low levels of equity and highlighted the role of political resistance and vested interests in preventing more effective reforms. Hellwig's clear, concise explanation of capital structures and regulatory loopholes demonstrated how banks remain “too big to fail” and why the public continues to bear the brunt of banking crises.
A Heated Panel Discussion: Conflicting Perspectives on Financial Reform
The keynote was followed by a lively panel discussion that brought together a distinguished group of experts, each with a unique perspective on the issue: Joining Admati and Hellwig on the panel were Martin Blessing, Chairman of the Board of Directors of Danske Bank, and Simon Gleeson, senior consultant at Clifford Chance, specializing in banking and financial markets regulation. The debate was moderated by Mark Whitehouse, editor at Bloomberg.
Admati and Hellwig maintained their stance that the banking system remains dangerously fragile and in need of far more radical reform. They were vocal in criticizing the current state of regulation, arguing that the financial sector is still rife with practices that place the global economy at risk. Admati noted that banks had been allowed to operate with too little equity for too long, and that the costs of this complacency were borne by society as a whole.
In contrast, Martin Blessing defended the current system’s structure and resilience. While acknowledging that more can always be done to improve risk management, he argued that the financial industry has made significant strides since the crisis. Blessing pointed to the increased regulatory oversight and enhanced capital buffers that banks are required to maintain. He asserted that lessons had been learned from the past and that the system was far more robust today than in 2008.
Simon Gleeson agreed with some of Admati and Hellwig’s criticisms but also urged to understand banks primarily as payment services providers instead of credit suppliers. He cautioned against overly prescriptive reforms. According to Gleeson, the complexity of the financial markets requires a balance between regulation and flexibility, warning that too much regulation could stifle innovation and economic growth.
The discussion between the panelists grew particularly intense when the topic of moral hazard was raised. Admati and Hellwig argued that banks continue to take excessive risks, because they know they will be bailed out by governments if things go wrong. Blessing pushed back, emphasizing that banking is inherently a business of risk and that regulators have introduced mechanisms to mitigate these dangers without suffocating the industry. Gleeson purported that crisis management frameworks today are much better prepared to handle the failure of cross-border banking groups and that therefore cross-border M&A transactions should not be blocked because of resolution challenges.
Image: Uwe Dettmar
