Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

another information related to today's conversation. Our email address is mailadicontalk.org. We'd

love to hear from you. Today is July 20th, 2011, and my guest is Anat Admadi, the George GC

Parker Professor of Finance and Economics. At the Graduate School of Business at Stanford

University, Anat, welcome to Econ Talk. Thank you. Our topic today is financial reform,

and in particular some proposals that you've made, and I did you have about making the

banking system more stable and focusing on capital requirements. So talk about the idea

of equity in the balance sheet of a firm and what a healthy proposal would require compared

to what is going on today. Yeah, I think the first thing to really talk about when you

talk about capital requirements is what does it mean capital because they use this word

very differently in banking than anywhere else. And so people get very confused about

this. You start having the journalist explain to you that, you know, first of all, everybody

says you hold capital. That's already a big piv that I have about the word hold because

what we're talking about is the following. It's critical to think of balance sheets when

you think about this. So everybody has a balance sheet. Governments has balance sheet. All

banks, all companies have balance sheets. And a balance sheet basically has two sides

or it's stacked together one on top of another. And basically one part of it that balances

with the other is what you own what you have. What are your assets. And then against that

are basically so the liability and equity. So these are things that you kind of owe versus

the things that you own. These are kind of claims against the assets. So these are promises

...