Baltic Business Research

Summary

Generally speaking, the main impediments to well-working regulations and collaborative agreements come from human behavior (psychology). The current global financial and economic crisis can to a great extent be attributed to phenomena like greed, abuse of incentives, performance pressure (“angst”), overconfidence, neglect of historical experience, etc. Without improved research / interest for behavioral finance and understanding of this exciting scientific orientation, financial regulations will be continually limited in their efficiency. The “homo oeconomicus” has disappeared from global financial markets.

Another important step forward is the recognition that regulations should be completely designed for giving the right incentives to players on financial markets. “Perverse incentive structures” – as Rajan calls one of the main characteristics of the current crisis – should not exist anymore in the future regulatory framework.    

Collaborative agreements make sense in certain cases, for example, on an international basis between public institutions. History of financial markets, however, has demonstrated many times that collaborative agreements between banks and public institutions – according to their design – many times cannot work as a powerful instrument for a long time.

Instead, it would make sense to raise the status of collaborative agreements. This could be achieved by including certain agreements as conditions for “good corporate governance”.  Such a change could be made efficient by demanding comments from banks on certain collaborative rules they should follow carefully on a regularly basis in their quarterly or annual reports. In other words: Much more pressure should be put on banks’ performance in corporate governance. And the press should write more about it.

Whatever regulatory or collaborative changes we are talking about, one extremely important precondition for – hopefully – (somewhat) declining future financial risks should be mentioned particularly:  increased transparency, demanded by regulators and central banks. This need cannot be stressed sufficiently. Innovations in the past such as Structured Investment Vehicles (SIVs) and conduits must be made much more transparent than has been the case in recent years – but the quality of credits must also be made more transparent. Supervision should become much more active in this respect. By the way China should join the path to increased financial transparency as well – as it underwrote this spring in the communiqué of the London G20-summit.

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