What is wrong with today's banking system? The past few years have shown that risks in banking
can impose significant costs on the economy. Many claim however that a safer banking system
would require sacrificing lending and economic growth. The Bankers' New Clothes examines this
claim and the narratives used by bankers politicians and regulators to rationalize the lack
of reform exposing them as invalid. Anat Admati and Martin Hellwig argue we can have a safer
and healthier banking system without sacrificing any of the benefits of the system and at
essentially no cost to society. They show that banks are as fragile as they are not because
they must be but because they want to be--and they get away with it. Whereas this situation
benefits bankers it distorts the economy and exposes the public to unnecessary risks. Weak
regulation and ineffective enforcement allowed the buildup of risks that ushered in the
financial crisis of 2007-2009. Much can be done to create a better system and prevent crises.
Yet the lessons from the crisis have not been learned.
