Systemic People Risks: Product Mis-selling
Introduction
Operational Risk: Basel II Regulation
New Models of Systemic Risk
Systemic Operational Risk – Extreme Operational Losses
Universal Banking, Universal Cultures
Macro-Cultures
Innovation and Complexity
A Seismic Model of Systemic Operational Risk
Systemic People Risks: Product Mis-selling
Market Manipulation
Legal Risks
Systemic Technology Risks
Regulation of Systemic Risk
Macroprudential Regulation
Microprudential Regulation
Overview
This chapter will look at examples of the mis-selling of financial products, including auction rate securities (ARS), residential mortgages in the global financial crisis (GFC), payment protection insurance (PPI) and Interest rate hedging products (IRHPs).
PRODUCT FAILURES
Chapter 6 discussed the product lifecycle model of financial products in which there is an evolution of a successful product from development, through growth and maturity to eventual decline. In describing Merton’s process of financial innovation, Bookstaber (2009) highlights the manic pace of the growth of new financial products in the 21st century, each more complex than the previous, and “each new round of instruments was more sophisticated and complex than those that preceded it, although not necessarily understood as well”. It is hardly surprising then that some products fail. Of course, many will fail early in their lifecycle because the inherent problems are detected fairly quickly, but some will grow rapidly before failing. It is these products, such as PPI, that tend to precipitate the largest systemic operational risk losses, simply because they have become adopted across the industry and, more
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