The Bankers' New Clothes By Anat Admati and Martin Hellwig

By Anat Admati and Martin HellwigPublished by Princeton University Press

"It's no secret that the banking system has some powerful critics", says Brendan Greeley in Businessweek. Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute, the authors of this new book, are amongst them.

As the FT's Martin Wolf notes, the book starts with a summary of basic financial theory "with simple examples that any moderately numerate individual can understand". It then explains how these ideas apply to banks and why banking apologists "have spun intellectual raiment as invisible as the emperor's new clothes".

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The authors' proposed solutions are stark and will make many bankers wince. First, "banks usually ask us to hold 20% equity when we borrow. We should ask the same of them."

Any bank that can't raise equity to meet this target must be made to retain profits until it does. Any bank that isn't profitable "needs to be wound up smartly", as Wolf puts it. Banks are "grossly undercapitalised" and far too complex. Without change, "the model is intellectually bankrupt".

Matthew Ygelsias of Slate magazine used to be sceptical about the need for higher capital requirements, but since reading the book, he's changed his mind. Not only would the authors' recommendations "make the banking system safer", they would also "drastically reduce the need for bail-outs" and help to "rebalance lending behaviour somewhat away from consumer debt and toward productive investment".

Yet some of thebook's claims are questionable, says Ygelsias, especially that "imposing stricter capital regulation would have no costs".

The authors may have overlooked the fact that not only fat cats but ordinary workers and whole communities "can suffer huge economic losses as a result of stricter [rules]". While taxpayer guarantees amount to hidden support, rolling back existing subsidies and imposing tougher capital requirements "really would make some kinds of [key] loans scarcer".

Arnold King, writing in The American, agrees. The book is right to ask "whether banks need to be levered as highly as they are" and to talk about "the unhealthy co-dependence of government officials and banks". Yet Admati and Hellwig rely too much on verbal leverage': "I found the ratio of rhetoric to evidence in their book to be too high for my taste."

Nonetheless, Kirkus Reviews praises the book for offering clear guidance on "what remains to be done, when it comes to safeguarding financial institutions". Read this book, advises Wolf, to understand why "further crises will come".

The Bankers' New Clothes: What's Wrong With Banking And What To Do About It, by Anat Admati and Martin Hellwig. Princeton University Press, £19.95.