Failure at the Lower Levels

16 Pages Posted: 14 Sep 2011

See all articles by Martin Fries

Martin Fries

University of Munich - Center for International Law

Date Written: September 14, 2011

Abstract

This case study analyzes the reasons for failures by Credit Suisse banking advisors prior to the recent financial crisis and attempts to develop a strategy for international law that will dis-incentivize advisors from failing, thereby averting consumer losses in the future.

The paper does not focus on failures at the level of dealers in the financial markets but on potential malpractice of banking advisors who recommend hazardous investments and who might be held responsible for overoptimistic valuation of credit collateral. The case of Credit Suisse is widely recognized as an example of systematic, quasi-fraudulent advisory service that led to severe losses for low-income clients and precipitated an unprecedented consumer trust crisis. A crucial goal of this analysis is to discover the incentives that motivated the banking advisors to engage in this activity and to describe potential, internationally appropriate, legal means to overcome this trust crisis.

The study concludes that banks will need to fundamentally change the incentives of their advisors to achieve high advisory quality and regain their clients’ trust. These changes will most notably comprise financial (counter-) incentives such as the abolition of commissions, a new structure of profit-related salaries, and penalties for nontransparent advisory behavior. Parallel to the need for action within the banks, is government responsibility to legally coerce banks into setting so-modified incentives. By these means, cases such as the one of Credit Suisse will be prevented. Furthermore, these measures can help to mitigate future trust crises and thereby add to the stability of banking business.

Keywords: Banking, Advisory, Financial Crisis, Trust, Trust Crisis, Investments, Incentives, Consumer Protection

JEL Classification: G21, G24, K00, K10, K12, K20, K22, K33, M52, P34

Suggested Citation

Fries, Martin, Failure at the Lower Levels (September 14, 2011). Available at SSRN: https://ssrn.com/abstract=1927238 or http://dx.doi.org/10.2139/ssrn.1927238

Martin Fries (Contact Author)

University of Munich - Center for International Law ( email )

Veterinaerstr. 5
Munich, Bavaria 80539
Germany

HOME PAGE: http://www.jura.uni-muenchen.de/personen/f/fries_engel_martin/index.html

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