Ten Challenges to Have a Sustainable Financial System

Abstract

Abstract Purpose This chapter outlines the need for a sustainable financial system in the wake and aftermath of the recent financial crises. Beginning with the widely accepted definitions of the financial system and the roles of the many participants in the system, we ask whether the financial system has lived up to expectations. Of particular interest is whether the financial system has fulfilled its obligations in the area of provision of credit, liquidity, and risk-management services. Methodology/approach We review the Neoclassical Economics, the Institutional and the functional approaches to the design of a financial system with a view to understanding the recent lack of stability exhibited by the system. We identify the many financial innovations that have been proliferating in recent years due to advances and improvements in computer technology, valuation techniques, and financial engineering. We highlight the deleterious impact of the financialization of economies and excessive development of derivative markets. After defining financialization, we give specific examples of the nature and impact of cat-bonds, securitized subprime loans, and credit-default swaps and their role in the propagation of the recent financial crisis. Finally, we propose some courses of action to secure the global financial system. Findings We identify ten challenges in achieving a sustainable financial system in the future and stress the need for all stakeholders to work to put the financial world in order and to restore confidence in the financial system. Research implications Scholars and practitioners might take into account these dimensions in their courses and their behaviors. Practical/social implications This approach participates to rebuild the financial system. The aim over the long term is to re-embed finance; we need to put finance with respect to both economy and society. Originality/value Arguments in this chapter are straightforward; there are things that regulators are implementing; for others, nothing has been decided yet. This chapter gives an academic perspective to help authorities to regulate banking and financial activities and products.