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

Luigi Guiso

No 1006, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

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.

Pages: 34 pages
Date: 2010, Revised 2010-03
New Economics Papers: this item is included in nep-ban and nep-soc
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Citations: View citations in EconPapers (25)

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Working Paper: A trust-driven financial crisis. Implications for the future of financial markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:1006

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