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Capital FailureRebuilding Trust in Financial Services$
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Nicholas Morris and David Vines

Print publication date: 2014

Print ISBN-13: 9780198712220

Published to Oxford Scholarship Online: October 2014

DOI: 10.1093/acprof:oso/9780198712220.001.0001

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How Changes to the Financial Services Industry Eroded Trust

How Changes to the Financial Services Industry Eroded Trust

Chapter:
(p.32) 2 How Changes to the Financial Services Industry Eroded Trust
Source:
Capital Failure
Author(s):

Sue Jaffer

Nicholas Morris

Edward Sawbridge

David Vines

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198712220.003.0002

This chapter describes how the previous structure of the industry maintained relationships of trust. Financial firms were specialised, with retail and commercial banks managed separately from investment banks, which avoided potential conflicts of interest and contained moral hazard. Investment banks saw their role as serving clients and earning fees from doing so. However financial deregulation eroded the conditions required for trustworthiness. The industry consolidated into universal banks which were ‘too big to fail’, and greatly expanded demands for mortgages and pensions created commoditised services. The eventual dominance of ‘sales’ over ‘relationships’ people within universal banks created conflicts of interest between different employees and between employees and customers. It also saw the spread of high-powered incentives to sell products and to undertake excessive risk taking. The capital for proprietary trading was no longer provided by partners and instead the money from bank depositors, creditors, and ultimately taxpayers was put at risk.

Keywords:   financial deregulation, too big to fail, efficient markets, conflicts of interest, financial services, principal agent, asymmetric information, financial innovation, moral hazard, risk taking

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