Petersen & Wiegelmann: Institutional Economics, Risk Management, and Breakdown of Corporate Social Responsibility | Towards a New Architecture of Financial Markets

ABSTRACT:

The breakdown of the financial markets in fall 2007 and the following debt crisis in the EU have produced an enormous mistrust in financial products and the monetary system. The paper describes the background of the crisis induced by functional failures in risk management and the multifold principal agent problems existing in the financial market structures. The innovated nontransparent financial products especially by the so-called shadow banks have mixed up differential risk weights and puzzled or even fooled formerly loyal customers.  Contemporaneously abundant liquidity on the international financial market accompanied by easy money policies of the Fed in the US and the ECB in the euro zone have depressed the real interest rate to zero or even negative values. Desperate investors are seeking for safe assets but their demand remains unsatisfied. Low real interest rates and the consequently lacking compound interest effect in the same time jeopardize private as well as public insurance schemes being dependent on capital funding: the demographic crisis becomes gloomy. Therefore, the managers of the financial markets have to reestablish CSR and to separate the markets into safe-asset areas for the usual clients and “casino” areas for those who like to play with high risks. Only with transparency and risk adequate financial products the lost commitment can be regained.

 

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