JPMorgan Chase & Co. (JPM): How To Steer Clear Of Another Financial Crash

Throughout the book, Admati and Hellwig emphasize that insisting on more equity and less debt is the best and easiest solution of all. Alas, they believe that Basel III, the most recent global standard on capital adequacy, is insufficient to the task at hand. Even though Basel III is supposed to be stricter, it still permits banks to have equity that is just 3% of total assets in some instances.

Ultimately, the authors argue that equity relative to total assets needs to be increased considerably, and that this will not impose meaningful costs on society. And Admati and Hellwig firmly reject the notion that increased capital requirements will result in decreased lending – in fact, they feel strongly that that particular argument is a red herring put out there by the bankers themselves.

Too complex to understand?
If the solution is as simple as Admati and Hellwig suggest, then why haven’t we adopted it by now? Here, the authors are very persuasive. They argue that Wall Street bankers have succeeded in making this topic appear to be too complicated for ordinary citizens to consider. Individuals who don’t know the difference between reserve requirements and capital requirements, for example, are understandably reluctant to weigh in on the broader topic.

Reform along the lines proposed may actually be a possibility in the near future, however. The new banking bill put forward by Senators Sherrod Brown and David Vitter seems to be informed by some of the thinking expressed by Admati and Hellwig.

One of the greatest strengths of this book is that it clearly explains the issues for the ordinary reader. Financial reform shouldn’t be left solely to Wall Street bankers and their captured policymakers in Washington, D.C., to decide. Regular citizens must make their voices heard, and this book will help them understand the basic terminology and concepts. I encourage everyone with an interest in effective financial reform to pick up a copy today. This just might be the most important book of 2013.

The article How to Avoid Another Catastrophic Financial Crisis originally appeared on Fool.com and is written by John Reeves.

John Reeves has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase (NYSE:JPM).

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