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Conflicts of Interest and Market Discipline in Financial Services Firms

In: Risk Management

Author

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  • Ingo Walter

    (New York University)

Abstract

There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes — market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation

Suggested Citation

  • Ingo Walter, 2005. "Conflicts of Interest and Market Discipline in Financial Services Firms," Springer Books, in: Michael Frenkel & Markus Rudolf & Ulrich Hommel (ed.), Risk Management, edition 0, pages 25-51, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-26993-9_2
    DOI: 10.1007/3-540-26993-2_2
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    Cited by:

    1. Eric Zitzewitz, 2014. "Retail Securities Regulation in the Aftermath of the Bubble," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 545-588, National Bureau of Economic Research, Inc.
    2. Gann, Philipp, 2008. "Der Internal Capital Adequacy Assessment Process als regulatorischer Treiber eines aktiven Kreditportfoliomanagements," Discussion Papers in Business Administration 4831, University of Munich, Munich School of Management.

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