Stanford professor on the future of banking regulation

To financials this afternoon, the Fed publishing the results of its annual stress test examining how the nation's 32 largest banks perform under a hypothetical downturn scenario. And of course, that's as regulators float potential changes to Basel 3 end game capital rules that were proposed last year. Joining us now, the George GC Parker Professor of finance and Economics at Stanford Graduate School of Business, Anat Admati. Anat is also the co-author of the bankers new Clothes. What's wrong with banking and what to do about it and not. Thank you so much for being here. I know you have been kind of at the forefront of saying that some of these banking regulations are just simply a mess right now. So I want to start with Basel 3 end game and the prospect of those rules getting watered down. Is that something that you think is a good idea? Well, I think the entire regulation is fully designed, but I generally think that more equity capital, not capital being held on the sidelines as they like to present it, it's on the liability side, more equity funding is is generally better. Obviously there's a lot of risk on the on the asset side taken, but I think weakening is generally these kinds of regulations not not a good idea. So do you think then that there needs to be reforms that would strengthen the oversight, strengthen the capital rules or or something else? What needs to be done, in your opinion, that would minimize the risk to the banking system all day bug? I mean, they need better supervision. Look at how supervisors messed up with SBB and everything. The insolvency was in front of their eyes and they wouldn't point it out for months until suddenly everybody really realized what was going on with SBBA little over a year ago. And of course, the target numbers are not even in the right range as all right now for the overall indebtedness, for how much the banks rely on equity versus debt funding, we're not even close. They just got to that position. It's very addicted to just rely on on a debt all the time if you can get away with it, but and nobody can get away with it more than the bank. So they do they like it and they scream a lot if you want them to, you know, fund with more own money, good old shareholder money that in Silicon Valley is used happily and by most of the most of the economy with no regulation. But the banking system would say that the the more regulation that it endures, the more lending goes into the shadow banking system, which is much less regulated as it is. And there really isn't too much in the way of additional regulation expected. There is that something that you think is better for the health of the economy? Well, let's all this all this nonsense. We have a document called the the parade of bankers new clause continue and we count 44 floodplains. There are a few more in the footnote. So there is a lot being said. So I've heard it all. Let's talk about lending. The banks are complaining that you know, lending is not is done by others, but they're not doing that much lending. If you look at JP Morgan Chase, first of all, this book is in 2024 edition and we're sort of comparing it to when we first wrote it in 2013. And JP Morgan Chase was considered too big to fail then. And it's definitely too big to say now. From 2011 to 2021, the assets grew from two and a quarter trillion to three and three quarters trillion. And then they grew ever more even since the first Republican all of that. But let's look at the project funding and, and, and assets a little bit like these loans that they like to talk about. In 2011, they had over a trillion dollars, 3.1 of deposit and only lends about 700 million to .7 trillion deposit grew to about 2 1/2 trillion dollars up to 202 1/2 trillion dollars. That's a lot. But the lending is only about 1/2 of that. So the loans, the rest on the balance sheet, who who can discuss on all that there is on the balance sheet and all there is off the balance sheet. So let's not talk about equity funding when they're not even lending and and how it would affect lending when they're not even lending the passive unsecured, but insured deposits that they have so much to play with just that 2 1/2 trillion, they're not even lending only about half of that. So that's checkable and check. Now other set of banks are doing lending, but oftentimes they have more attitude than the Mexican. Oftentimes they are themselves funded by banks. So just to talk about how little we know about what the banks are actually doing relative to what they're actually, they're always threatening that they will do or not do that we want them to do versus, of course, making making money, which is what they, you know, obviously want to do for themselves and their shareholders. I'm gonna, I will force you to, you know, decade old growth, but nothing's really changed on this issue of how pay their disclosures are and how little we can trust in numbers. Kevin Walsh was a Federal Reserve Federal Reserve governor and spoke in an interview in 2013 saying investors can't understand the nature and quality of the assets and liability the disclosures obfuscate more than they informed. A year later I was on a panel in Davos with Paul Singer from Elliott Management and what he said either on this panel on the sidelines, something like the unfathomable nature of banks accounts makes it possible to know what a sound the relative positions in particular are difficult for outside investors to park. I can go more into the relative because they just failed the living will on the basis of the relative. Bottom line is yes, we need to increase the the the all the transparency and all the cushions on the bank.