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Trust in the Financial Services Industry
Reinhard Bachmann Research Project Workshop Project Ref ES/N013344/1: Delivering Inclusive Financial Development and Growth SOAS University of London 3.-4. March 2017
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What is Trust? Mind Experiment The Real World
Social Coordination Mechanisms Reduce Uncertainty Allow for Specific Assumptions Pre-commitment Social Systems Can Evolve
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Trust, Uncertainty and Risk
Trust Absorbs Uncertainty Trust Produces Risk > How can an actor find ‘good’ reasons to assume that the inherent risk of trust low?
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Trust and Institutions
Luhmann (1979): Legal Norms (but should remain latent) Other Relevant Institutions in Business Relationships > shared knowledge > ‘world-in-common’ Other views: e.g., Coleman (1990): L/G><=p/1-p
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Types of Trust and Trustworthiness
Calculus-based Knowledge-based Identity-based (Lewicki and Bunker 1996) Ability Benevolence Integrity (Mayer, Davis, Schoorman 1995)
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Organizational Components of Trustworthiness
External Governance: Institutions and regulations Internal Governance: Role and composition of Board of Directors Strategy: signaling real values and priorities Structures and Processes: sets parameters for certain behaviours Culture: shared beliefs Leadership and management practices: sets examples Public Reputation: judgement by stakeholders > Congruence (Gillespie and Dietz 2009)
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What can be learned from the GFC?
‘Financial markets hinge on trust, and that trust has eroded’ (Stiglitz 2008) ‘We cannot survive without the trust of our clients’ (Lloyd Blankfein, BBC 2010) > What went wrong and what needs to be done to help build trust (again)?
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External Governance Clinton and Bush relaxed regulation
In 1999 Glass-Seagall Act removed the separation of commercial (depository) banks and investment banks in US Canada and Australia kept tighter regulation -> G20’s Basel III Committee: capital reserves of 7% required.
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Internal Governance, Structures and Process
Incentive Systems: Short-term vs. Long-term Increase in Risk Management Capacity . Corporate Systems; Composition and Role of the Board
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Culture Change ‘Just as there was a time when people could smoke on airplanes, .. there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done, That just changed.’ (Michael Lewis 2010)
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Conclusion Trust is central category in financial services industry
Regulation is central to trust and financial services industry Internal governance, structures, processes and culture are equally important to develop/increase trust Trust and trustworthiness can be demonstrated/managed
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Further Reading Bachmann, R. and A. Zaheer (eds.) (2006), Handbook of Trust Research, Cheltenham: Edward Elgar. Bachmann, R. and A. Zaheer (eds.) (2008), Landmark Papers on Trust, 2 Volumes, Cheltenham: Edward Elgar. Bachmann, R. and Inkpen, A. (2011), Understanding Institutional-based Trust Building Processes in Inter-organizational Relationships. In: Organization Studies 32,2. pp Bachmann, R, Gillespie, N. and Priem, R. (2015), Repairing Trust in Organizations and Institutions: Toward a Conceptual Framework. In: Organization Studies 36 (2015), 9: pp
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