Chinese Wall (financial world)

In the financial world, Chinese Wall is used as a metaphor for the practice of separating departments in a company that are headed by different objectives in such a way that there is no exchange of information, and thus conflicts of interest are avoided.

history

The term was coined in the USA after the stock market crash of 1929. The US government saw the need to create a separation or information barrier between investment bankers and the underwriting business . The aim was to limit the conflict of interest between an objective valuation of companies and the desire to support them in an IPO.

The term is based on the Great Wall of China as a symbol of size and strength and its ability to effectively separate two sides.

Ironically, both the history of the Great Wall of China and the practice of the concept of Chinese Walls are full of examples where this separation did not work, or at least failed to achieve its goal.

In Germany, this was last the case in 2001 and 2002, when it repeatedly emerged that companies that had gone to the Neuer Markt with brilliant assessments by the banks' analysis departments and thus the banks through their issuing departments had equally brilliant proceeds from the Business in accompanying IPOs had turned out to be of low value a short time later. The public got the impression that some of the analyzes were deliberately too rosy to increase the earnings of their own business.

present

Even today it is still the rule that all processes of an IPO, including financial analysis and price maintenance , are carried out by different departments of the same bank.

In IT security, the concept of the Chinese Wall was taken up in the Brewer-Nash model .