Redesigning Financial Industry

Collapse of Financial Markets

M. Emre SenalOkan Altinkok

Izmir University of Economics, Faculty of Economic and Administrative Sciences, Turkey

People have lost their savings in 2008 Mortgage Crisis.

Hunger for more profit among financial industry have increased in the last decades.

Financial institutions have taken positions against mortgages (in 2008) and countries (in Eurozone Crisis) by using derivatives. Unregulated derivatives damages global markets.

Countries may continue to bill the bailouts to the taxpayers!

If risk apetite is not controlled, financial industry may get out of control.

When doing business in Greece become more risky, Institutions buy CDS to hedge their risks.

Financial Investments

CDS

If risk of Greece increases, Risk Premium of Greece CDS will also increase. This means Institutions make profit by taking position against Greece.

Financial Investments

CDS

So, Institution which is long on CDS makes money while Greece is collapsing. In the same time, collapse of Greece gains speed.

This process was similar in 2008 Mortgage Crisis. It is known that Institutions had taken positions against mortgages in the last financial crisis.

Financial Institutions

Financial Institutions

Financial Industry must be regulated (not to be deregulated!), transperancy of transactions must be provided,

Derivative instruments

must be controlled

and regulated.

Assets and Liabilities of financial institutions must be regulated more strictly.Reserve ratios must be increased to avoid bankruptcy of these institutions

A derivative can provide 20 times more profit than other securities

Government institutions should be strenghten to apply these regulations and supervisions.

Supervisions and Regulations of Basel Commitee should be expanded if possible.

Moreover, If it is needed, even a new path can be found.

By applying regulations

and supervisions,

financial recovery can be provided

in the following

decade(s).

Costs of crisis may no longer billed to the Taxpayers.

THANK YOU FOR YOUR ATTENTION