Beauchamp and Bowie discuss the issue of acceptable risk and note that government has been constituted to protect citizens from a variety of risks, though society has not yet decided the extent to which government should protect the citizens from risks to financial security, among other things:
It is now widely agreed that the primary responsibilities for risk reduction and disclosure of risk rest on corporations, but the government continues to play a controversial role in enforcing corporate responsibilities (Beauchamp and Bowie 179).
One of the areas of risk noted by Beauchamp and Bowie is the risk to investors and the need to protect investors from this risk. The authors note the complexities involved in this issue and the tension created among banks, brokerage houses, government entities, and investors by attempts to reduce risk:
Brokerage houses, money managers, and investment counselors demand as much freedom as possible to deal with their clients. . . Brokers with a large client base often do not adequately grasp the risk attached to the financial instruments they sell. Monitoring systems are usually loose, and direct supervisors do not closely track how investments are sold or which, if any, disclosures are made to clients (Beauchamp and Bowie 183-184).
A recent case in international banking points to the problems involved in controlling risk in financial transactions and the difficulty of assigning responsibility. The case also recalls earlier situations in the United States where similar problems developed and created widespread harm in the 1980s. The international banking industry is in a period of change which will determine which firms survive and which fail, which sorts of relationships will prove most beneficial, which financial instruments will become the preferred product for investors, and a variety of other issues. The two major forces acting on the industry at the present time are increasing c...