Financial Innovation, Regulation and Crises in History

Can we have a general theory of financial innovation processes? A conceptual review
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International lessons should inform the U.S. approach

Concern over certain risks to the market and consumers by nonbank providers has led regulators to prevent banks from partnering with those unsupervised entities. Krugman The Guardian , 20 January. An improved bankruptcy regime 30 would result in the timely and fast resolution of financial institutions that succumb to financial risks of any kind, therefore limiting the potential damage and contagion risk resulting from this failure. The problems in the home mortgage market would not have produced a crisis bubble without important changes in how these loans were securitized. Chiron Media Wallingford, United Kingdom. There seems to be a tradeoff between the costs of financial innovation systemic fragility, market volatility and its benefits faster growth.

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Private equity and venture capital Recession Stock market bubble Stock market crash Accounting scandals. Types of banks. Funds transfer. Automated teller machine Bank regulation Loan Mobile banking Money creation Bank secrecy Ethical banking Fractional-reserve banking Full-reserve banking Islamic banking Private banking. Further information: Financial history of the Dutch Republic. Main article: Securities commission. Main article: Bank regulation. Main article: List of financial regulatory authorities by country. Routledge, Reinhart and Kenneth S.

State Banking Authorities. Consumer Action Website. Retrieved August 5, Oxford University GEG. Wilmott Magazine. Financial markets. Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock. Authorised capital Issued shares Shares outstanding Treasury stock. Electronic communication network List of stock exchanges Trading hours Multilateral trading facility Over-the-counter.

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Economic, financial and business history of the Netherlands. In contrast to findings in the literature regarding the lack of governance in financial innovation processes i. However, this was limited to internal non-regulatory mechanisms such as periodic assessments and testing. Nevertheless, the use of some form of statutory governance was identified in both cases regardless of what it involved and when it occurred in the innovation process.

This suggests the presence of an information rather than governance void that could be addressed by articulating internal and external innovation governance mechanisms in more open and transparent ways to stakeholders and the public. Despite this, findings from the analysis of the two cases show an abundance of mechanisms for governing innovations after they were commercialised—what Asante et al.

These comprised regulatory and self-regulatory instruments, such as legislation and industry standards, that appear to have occurred through processes similar to those suggested by Cox Regarding ATMs, Guerette and Clarke argue that governance of the use of ATMs was limited in the early s since there were few security concerns.

By the late s to early s, however, the US banking industry had experienced an upsurge in ATM robberies. This fostered an initial response in which a leading bank developed a technical manual and guidebook for preventing ATM crime. Unfortunately, this did not yield positive results, and the industry faced huge amounts of civil litigation on the matter, thus causing state and city governments to introduce ATM security standards and legislative directives.

It can also be argued that stakeholders in the CDO case identified a number of issues including the possibility of high default risk , which they sought to address through self-regulatory mechanisms such as embedding credit rating agencies, audit companies, and legal experts in the CDO creation process.

Regarding the financial innovation governance process suggested by Stout , limited secondary data on the ATM case makes it difficult to assess the extent to which it is applicable. However, a study by Mehta and Nolan suggests there is room to corroborate their model with the CDO case. In this framework, Mehta and Nolan suggest that lawmakers have yet to resolve the issue of whether CDO-related claims are enforceable in court.

Although I found no evidence of the existence of private enforcement agencies to necessitate a shift to codification and de-codification, an understanding of the issues at stake as court procedures unfold could contribute to such a move in the future. However, this may be difficult as Mehta and Nolan emphasise the diverse nature of individual CDO transactions, which they believe will make the generalisation of claim types and the resolution of disputes difficult.

Regarding the ATM case, these stakeholders interacted through elements of co-innovation Lee et al.

Financial Innovation, Regulation and Crises in History

Similarly, designing CDOs involved engagement with a broad group of stakeholders, including securities firms, CDO managers, rating agencies, and financial guarantors. Despite this, the involvement of end users i. Further, the introduction of the ATM Industry Association in the late twentieth century long after ATMs emerged in the early twentieth century supports, to some extent, arguments in the literature Pol, ; Germain, ; Pacces, that financial innovation governance lags behind financial innovation itself.

This study aimed to investigate how innovations occurred and were governed in two major financial innovations.

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While the first occurred through an unstructured process, the latter occurred in a more structured way. Therefore, it can be argued that innovation processes for monetary financial institutions can fall within a continuum of structured and unstructured approaches. Innovation generally occurred within longer periods for ATMs, contrasting with findings in the literature. This leads to the argument that for financial innovations that are significantly disruptive, new to the market, and technological in nature, lead times can be much longer.

Further, the study also confirmed the multi-stakeholder nature of financial innovation as well as the use of both statutory regulation and self-regulation as instruments in its governance. This leads to the conclusion that while financial innovation is governed, innovation processes and their governance can vary significantly in different areas of the financial sector landscape and associated innovation contexts; these are neither stable nor generalisable when considering the financial sector as a whole.

Thus, there is a need for more empirical research on organisations to shed light on such variability. Moreover, there is a need for processes of knowledge exchange and mutual learning regarding innovation governance across stakeholders in the sector as a whole. The findings regarding the definition and features of financial innovation are not necessarily new.

They largely reiterate and reinforce findings already discussed in the literature on financial innovation. However, they are important since they provide the context within which financial sector innovators must understand and frame any conceptualisation of responsible financial innovation. This context includes the fact that innovators may experience extreme dilemmas of control Collingridge, because of short lead times in the financial innovation environment.

emscherperle.de/error/chesapeake/negi-neue-seiten.php On the other hand, the findings regarding the management and governance processes in financial innovation and its associated mechanisms are novel. At present, innovation and its governance across the sector remain opaque to the outside world. Findings such as the use of structured processes to manage some financial innovations and the existence of governance mechanisms suggest there is room to embed a responsible innovation framework Owen et al. Such modifications could include redefining what good deliberation should involve in particular settings e.

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The author thanks Prof. Richard Owen for his invaluable guidance, supervision and proof-reading support. Further, much appreciation goes to her husband Albert Kwame Arthur and her son Nyameye Woodruff Arthur for their cooperation and encouragement. Her research interests are in the area of Entrepreneurship and Innovation. She declares that she has no competing interests. Skip to main content Skip to sections. Advertisement Hide. Download PDF. Financial Innovation December , Cite as.

Financial innovation and its governance: Cases of two major innovations in the financial sector. Open Access. First Online: 18 May The nature of financial services and associated innovations The financial services industry comprises a broad range of businesses with distinctions that are not clearly distinguished Asmundson, Automated teller machines ATMs The ATM is a computerised self-service device that dispenses cash and performs other banking services with the insertion of a card and the entering of a personal identification number PIN Curran and King, Acknowledgements The author thanks Prof.

Armstrong, M. And Y. Towards a practical approach to responsible innovation in finance: New Product Committees revisited. J Finance Regul Compliance , Google Scholar. Asante K, Owen R, Williamson G Governance of new product development and perceptions of responsible innovation in the financial sector: insights from an ethnographic case study. Asmundson I What are financial services? How consumers and businesses acquire financial goods such as loans and insurance. Finance Dev —47 Google Scholar.

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