Do you remember this line spoken from Polonius to his son Laertes in Shakespeare’s Hamlet? The full quote is:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
I ask this because of a 2013 book by Stanford Economics and Finance professor named Anat Admati. Prof. Admati advocated for financial reform of a certain type in her 2013 book, The Banker’s New Clothes: What’s Wrong With Banking And What To Do About It.
Banking in specific, and matters of fiscal and monetary policy in general, are relatively foreign to me so I was interested in the CliffsNotes version. Admati argues that banks should rely in greater part on shareholder money and less up-on borrowed funds. She claims that using your own money is less risky and better for national economic stability than using “other people’s money”
The Professor no doubt sides with Polonius
Add my vote to this Prof’s and Polonius’s position. Admati contends that bankers at very large institutions take great risks because they are not fully responsible for the consequences and risks. The banking failures and fiascos among related financial institutions of the past decade provide ample evidence of damage caused by risky loans.
Here is a comparison easy for non-financial types to absorb. Admati equates a bank’s equity to down payment on a house. If the homeowner falls into trouble, he or she can walk away because it is other peoples’ problem. Bingo!
The Prof points out that “capital requirements” for banks boil down to a few percentage points of a bank’s total assets. Without getting lost in the tall weeds of finance, Admati suggests a 20% to 30% equity requirement for banks.
I may have found a new financial guru.