Capital Failure: Rebuilding Trust in Financial Services
08 Oct 2014
The book argues a loss of trust was a central cause of the Global Financial Crisis. Repairing the trustworthiness of the financial system is an urgent task. Capital Failure shows what is required to do this.
Economists have long believed that self-interest can lead to good outcomes and that markets are efficient. But, instead, the pursuit of self interest led those in the financial sector to behave in untrustworthy ways. Financial institutions neglected the interests of their clients, investing in projects with high short-term payoff and in speculative activities designed to achieve short-term returns. Their employees were motivated by inappropriate compensation schemes. They sold unsuitable products, loaded their clients with unacceptable risk and debt, extracted excessive fees, rigged markets, and defrauded clients. The economy does not work well if its financial system cannot be trusted.
The authors of Capital Failure believe that there is a pressing need for the financial services industry to become more professionalized, in a way which enables trustworthiness to return. The industry needs a culture which leads its employees to act in the interests of their clients, and of society at large, rather than solely in their own interests.
Capital Failure contains proposals for how this might be done. Reforms of governance are possible and can be supported by legal and regulatory arrangements. There are four key requirements: the appropriate definition of obligations, the identification of corresponding responsibilities, the creation of mechanisms which encourage trustworthiness, and the holding to account of those involved. The book shows how to reinforce the trustworthiness of specific parts of the financial services industry, so as to bring about better outcomes.
A description of this project and thanks to those who contributed can be found here
Summaries of the book and its chapters can be found here
A sample chapter can be found here