Reputational Risk and Conflicts of Interest in Banking and Finance: The Evidence So Far

Abstract

Financial services comprise an array of “special” businesses. They are special because they deal mainly with other people’s money, and because problems that arise in financial intermediation can trigger serious external costs. In recent years the role of various types of financial intermediaries has evolved dramatically. Capital markets and institutional asset managers have taken intermediation share from banks. Insurance activities conducted in the capital markets compete with classic reinsurance functions. Fiduciary activities for institutional and retail clients are conducted by banks, broker-dealers, life insurers and independent fund management companies. Intermediaries in each cohort compete as vigorously with their traditional rivals as with players in other cohorts, competition that has been intensified by deregulation and rapid innovation in financial products and processes. Market developments have periodically overtaken regulatory capabilities intended to promote stability and fairness as well as efficiency and innovation.