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A Trust-driven Financial Crisis.Implications for the Future of Financial Markets

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  • Luigi Guiso

    (European University Institute, EIEF and CEPR)

Abstract

The financial crisis has brought to light diffuse opportunistic behaviour and some serious frauds. Because of this trust towards banks, bankers, brokers and the stock market has collapsed to unprecedented levels and there are so far no signs of recovery. This paper uses survey-based information to document the collapse of trust, show its link to the emergence of frauds in the financial industry and discuss its consequences for the demand of financial instruments, investors portfolios and more generally investors reliance on financial markets. It argues that unless serious changes happen in the behaviour of the financial industry, the move towards safer portfolios and away from ambiguous securities that lack of trust entails, will have adverse effects on the availability and cost of equity financing. Accordingly a number of proposals to restore trust are discussed. Their common feature is to restore trust – a belief – by limiting the scope for opportunistic behaviour through a transfer of power from financial intermediaries to investors.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1006.

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Length: 34 pages
Date of creation: 2010
Date of revision: Mar 2010
Handle: RePEc:eie:wpaper:1006

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References

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  1. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," EIEF Working Papers Series 0812, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.
  2. Pierre Cahuc & Andrei Shleifer & Philippe Aghion & Yann Algan, 2009. "Regulation and Distrust," Sciences Po publications 14648, Sciences Po.
  3. Carlin, Bruce Ian & Dorobantu, Florin & Viswanathan, S., 2009. "Public trust, the law, and financial investment," Journal of Financial Economics, Elsevier, vol. 92(3), pages 321-341, June.
  4. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-35, January.
  5. Jappelli, Tullio, 2010. "Economic literacy: An international comparison," CFS Working Paper Series 2010/16, Center for Financial Studies (CFS).
  6. Markus Knell & Helmut Stix, 2009. "Trust in Banks? Evidence from normal times and from times of crises," Working Papers 158, Oesterreichische Nationalbank (Austrian Central Bank).
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Cited by:
  1. Enzo Dia, 2011. "Uncertainty, trust, and the regulation of the banking industry," International Review of Economics, Springer, vol. 58(2), pages 213-228, June.
  2. Algan, Yann & Cahuc, Pierre, 2013. "Trust, Growth and Well-Being: New Evidence and Policy Implications," CEPR Discussion Papers 9548, C.E.P.R. Discussion Papers.
  3. Georgarakos, Dimitris & Inderst, Roman, 2011. "Financial advice and stock market participation," Working Paper Series 1296, European Central Bank.
  4. Monti, Marco & Pelligra, Vittorio & Martignon, Laura & Berg, Nathan, 2014. "Retail investors and financial advisors: New evidence on trust and advice taking heuristics," Journal of Business Research, Elsevier, vol. 67(8), pages 1749-1757.

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