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Capital FailureRebuilding Trust in Financial Services$
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Nicholas Morris and David Vines

Print publication date: 2014

Print ISBN-13: 9780198712220

Published to Oxford Scholarship Online: October 2014

DOI: 10.1093/acprof:oso/9780198712220.001.0001

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Failures of Regulation and Governance

Failures of Regulation and Governance

(p.100) 5 Failures of Regulation and Governance
Capital Failure

Sue Jaffer

Susana Knaudt

Nicholas Morris

Oxford University Press

This chapter looks at the evolution of regulation over time and how reliance on trust and relationships has changed. It also examines the nature of the failures which occurred. In some cases these were errors of omission. In other cases the problems were intrinsic to the regulatory process, although they were worsened by changes to industry structure and incentives. Yet other problems were created or seriously exacerbated by regulation itself. Misplaced faith in the efficient market hypothesis and the risk models developed on the back of this theory allowed systemic pressure to go unchecked. Governance arrangements in the financial industry were also found wanting during the GFC. The chapter finishes by identifying the lessons that have been learned and examining the issues that remain—issues which require an explicit focus on encouraging trustworthiness and the use of mechanisms which reinforce appropriate values and norms.

Keywords:   financial regulation, corporate governance, financial market failure, efficient market hypothesis, financial industry

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