A Trust-driven Financial Crisis.Implications for the Future of Financial Markets
AbstractThe 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 InfoPaper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1006.
Length: 34 pages
Date of creation: 2010
Date of revision: Mar 2010
Other versions of this item:
- Luigi Guiso, 2010. "A trust-driven financial crisis. Implications for the future of financial markets," Economics Working Papers ECO2010/07, European University Institute.
- Corsetti, Giancarlo & Devereux, Michael P. & Guiso, Luigi & Hassler, John & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2010. "A trust-driven financial crisis. Implications for the future of financial markets," Munich Reprints in Economics 20109, University of Munich, Department of Economics.
- NEP-ALL-2010-08-21 (All new papers)
- NEP-BAN-2010-08-21 (Banking)
- NEP-SOC-2010-08-21 (Social Norms & Social Capital)
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