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Financial InnovationToo Much or Too Little?$
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Michael Haliassos

Print publication date: 2013

Print ISBN-13: 9780262018296

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262018296.001.0001

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Financial Innovation: Balancing Private and Public Interests

Financial Innovation: Balancing Private and Public Interests

Chapter:
(p.213) 10 Financial Innovation: Balancing Private and Public Interests
Source:
Financial Innovation
Author(s):

Michael Haliassos

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262018296.003.0010

Financial innovation takes different forms and is evolutionary, making it difficult to predict its costs and benefits ex ante. It is driven by user needs, especially their desire to alter the risk-reward structure they face, as much as by financial institutions’ desire to reap the temporary economic rents from innovation, which are subsequently diffused through imitation and standardisation. Banks have an economic interest to mitigate the risks that may result from innovation for their clients and for themselves; product approval processes and dedicated risk management processes are crucial instruments for this. But as private actors have no incentive to include potential social costs in their risk assessments, public intervention is needed to address the systemic risk implications of financial innovation. A macro-prudential approach seems more promising to safeguard financial stability than product-specific intervention.

Keywords:   Drivers of financial innovation, Regulation, Product life-cycle, Product approval, Systemic risk, Financial innovation as evolutionary process, OTC derivatives

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