Conflicts of Interest in the Financial Services Industry: What Should We Do about Them? (Geneva Reports on the World Economy 5)
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Conflicts of Interest in the Financial Services Industry: What Should We Do about Them? (Geneva Reports on the World Economy 5)

by Andrew Crockett, Trevor Harris, Frederic S. Mishkin, Eugene N. White
     
 

ISBN-10: 1898128790

ISBN-13: 9781898128793

Pub. Date: 01/28/2003

Publisher: Brookings Institution Press

The fifth report in this series focuses on conflicts of interest that arise when a firm combines multiple lines of business, creating multiple interests. Conflicts between research and underwriting in investment banking and between auditing and consulting in accounting firms are investigated, as are the problems that arise from rating agencies providing consulting

Overview

The fifth report in this series focuses on conflicts of interest that arise when a firm combines multiple lines of business, creating multiple interests. Conflicts between research and underwriting in investment banking and between auditing and consulting in accounting firms are investigated, as are the problems that arise from rating agencies providing consulting services and from universal banks combining commercial and investment banking. In the recent stock market collapse, confidence in the financial industry was shaken by numerous scandals. Beginning with Enron in 2001, scandals brought about the demise of prominent financial figures, damaged the reputation of premiere firms and destroyed the global accounting giant Arthur Andersen. Central to this crisis was the exploitation of conflicts of interest. Research analysts at investment banks were found to be distorting information at the behest of underwriting departments eager to promote new issues. Auditors appeared to sanction misleading accounting in order to gain business for the consulting side of their firms. Policy response in the United States was quick. Large fines were levied and regulators compelled the separation of financial security function, constraining financial conglomerates. But are these new regulations and safeguards adequate protection? What costs do they impose on the industry? This fifth title in the ICMP/CEPR series of Geneva Reports on the World Economy examines the problem of conflicts of interest in the financial system. Conflicts of interest lead to a decrease in information that makes it harder for the system to provide savers wit the accurate, essential information that induces them to provide credit to borrowers. This study focuses on conflicts of interest that arise when a firm combines multiple lines of business, creating multiple interests. Conflicts between research and underwriting in investment banking and between auditing and consulting in accounting firms are investigated, as are the problems that arise from rating agencies providing consulting services and from universal banks combining commercial and investment banking. Determining the appropriate remedy for a conflict is a challenge because the elimination of conflicts may also eliminate benefits from economies of scope. This study examines five generic remedies: market discipline, regulation for increased transparency, supervisory oversight, separation of financial activities by function, and socialization of the collection and distribution of information. The authors apply this framework to assess critically the Sarbanes-Oxley Act and the Global Settlement between American regulators and investment banks.

Product Details

ISBN-13:
9781898128793
Publisher:
Brookings Institution Press
Publication date:
01/28/2003
Series:
Geneva Reports on the World Economy, #5
Edition description:
New Edition
Pages:
119
Product dimensions:
6.13(w) x 9.25(h) x (d)

Table of Contents

List of Conference Participantsix
List of Figuresxiii
Acknowledgementsxv
Forewordxvii
Executive Summaryxix
1What Are the Issues?1
1.1Introduction1
1.2Information and financial markets2
1.3The role of financial institutions in financial markets3
1.4What are conflicts of interest?5
1.5Why conflicts of interest are important5
1.6A framework for evaluating policies to remedy conflicts of interest6
1.7The types of conflicts of interest studied in this Report9
1.8Plan of the study11
2Investment Banking: Conflicts of Interest in Underwriting and Research13
2.1Information synergies and conflicts of interest13
2.2The problem of analysts' compensation14
2.3The IPO boom of the 1990s16
2.4Analysts' 'excessive' optimism17
2.5Evidence of increasing conflicts in the 1990s21
2.6Remedies for the underwriter/analyst conflict of interest24
3Accounting: Conflicts of Interest in Auditing and Consulting27
3.1Introduction27
3.2The evolution of auditing, standards and regulation27
3.3The value of the audit opinion29
3.4Conflicts of interest31
3.5Separation of auditing and related services35
3.6The multi-product audit firm and auditor independence35
3.7Litigation risk and rules-based audits37
3.8Remedies39
4Rating Agencies: Conflicts of Interest in Credit Assessment and Consulting41
4.1Introduction41
4.2The role of rating agencies42
4.3Beneficiaries of an effective rating mechanism43
4.4The evolution of the rating industry44
4.5Do rating agencies add value?46
4.6Vulnerability to conflicts of interest48
4.7Remedies to conflicts of interest50
4.8Conclusion54
5Conflicts of Interest in Universal Banking55
5.1Introduction55
5.2American universal banking before Glass-Steagall56
5.3Investment banking and insurance57
5.4Commercial and investment banking59
5.5Testing the myths65
5.6Contemporary universal banking in the United States68
5.7Universal banking and conflicts of interest outside the United States69
5.8Remedies for conflicts of interest71
6Overview and Conclusions77
6.1When are conflicts of interest a serious problem?77
6.2Evaluating remedies79
6.3Recommendations81
Discussion and Roundtable87
Session 1Analysts and underwriters87
Session 2Auditors and rating agencies91
Session 3Universal banking96
Session 4Remedies101
Endnotes109
References115

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