The Incomplete Currency

Chapter 12Transparency as a Tool to Prevent Excessive Risk-taking and Contrast the Crisis

The uncontrolled diffusion of opaque financial products and the consequent assumption of excessive risk exposures played a key role in the origin and propagation of the international financial crisis to all levels of the financial and economic sector. At the systemic level, these dynamics have been possible largely due to the lack of transparency. The concealment of the risks or their improper identification, measurement and representation have created fertile ground for the spread of derivatives and structured financial products (many of which then proved to be “toxic”) in the portfolios of any category of market operator: banks and other financial institutions, sovereign states, local governments and savers.

12.1 The Need for a Market Logic as the Basis of the Financial Sector's Regulation

Let us first have a look at the financial industry. It is a sector which, though extensively regulated, very often operates on the basis of principles that are very far from those of safe and sound management, rather favouring the search for profitable opportunities which are inevitably accompanied by very high risks. This type of behaviour exists and persists with the complicity of serious inadequacies in the regulation of the financial industry. Even the growth of the collateralised interbank market is related to the fact that banks, ignoring their mutual financial conditions, distrust each other ...