Pros and Cons of Financial Innovation
This chapter gives an overview of how financial innovation has been one of the most influential factors in shaping today’s financial system and the world economy. It starts with a brief review of the financial innovation literature and addresses the deter
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Pros and Cons of Financial Innovation Serkan Çankaya
Abstract This chapter gives an overview of how financial innovation has been one of the most influential factors in shaping today’s financial system and the world economy. It starts with a brief review of the financial innovation literature and addresses the determinants of financial innovation. The next section examines the current debate regarding financial innovation and concludes with a discussion for the future of these new financial products and processes.
12.1 Introduction Financial innovation is one of the most influential factors in today’s financial system and the world economy. A brief review of financial innovation literature shows that the creation of new financial products and processes is not a new concept; rather, it has been part of the economic environment for centuries (Tufano 2003). Certainly, the central role of finance–especially after the 1970s–enhanced the importance of financial innovation. Yet there is an ongoing debate regarding the positive and negative sides of financial innovation and its role in shaping the future of financial markets. Some argue that financial innovation boosts the performance of the financial system by increasing market efficiency and risk allocation, calling it the ‘‘engine of economic growth’’ (Miller 1986). Others argue that financial innovation increases the frequency of financial crises like, the 2008 global financial crisis, which caused a more cautious approach. Both sides of the debate have reasonable arguments.
S. Çankaya (&) Department of Banking and Finance, Istanbul Commerce University, Sütlüce Campus _ Imrahor Cad. No: 90 34445 Beyog˘lu, Istanbul, Turkey e-mail: [email protected]
H. Dincer and Ü. Hacioglu (eds.), Globalization of Financial Institutions, DOI: 10.1007/978-3-319-01125-7_12, Springer International Publishing Switzerland 2014
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S. Çankaya
The main objective of this chapter is to provide a short overview of the subject and examine the debate between the positive and negative sides of financial innovation. First, it is essential to clarify the definition of financial innovation. Tufano (2003) describes financial innovation as the act of creating and then popularizing new financial instruments, technologies, institutions, and markets. Schneider (1997) classifies three types of financial innovations: (1) Financial system innovations can affect the financial sector as a whole and relate to changes in business structures, to the establishment of new types of financial intermediaries, or to changes in the legal and supervisory framework. (2) Process innovations cover the introduction of new business processes leading to increased efficiency and market expansion. (3) Product innovations include the introduction of new credit, deposit, insurance leasing, hire-purchase, and other financial instruments to improve the efficiency of the financial system. While there are many different definitions and classifications for financial innovation, there are several common features (Lev
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