Financial markets have always undergone changes . However since the 70s the speed of change has accelerated enormously . New types of financial instruments, financial markets and techniques have been developed. The most significant innovations have been the financial derivatives, e.g. futures, options and swaps and the development of securitisation which have mainly been created to manage risk and provide liquidity. The market for these instruments has become huge – by some estimates in excess of $100 trillion .
History shows that financial innovation has been a critical and persistent part of the economic landscape. But why has it been like that? First of all for a better understanding it is necessary to define the term ‘financial innovation’. Financial innovation is described by Van Horne as “the life blood of efficient and responsive capital markets” . He emphasis that it is part of the bedrock of our financial system. Merton views financial innovation as “the engine driving the financial system towards its goal of improving the performance of what economists call the real economy”.
Other authors define financial innovation as “the design of new financial instruments and techniques of financial intermediation, structural change in the financial system, with the appearance of new financial markets and changes in organisation and behaviour of institutions” as well as “the design of new financial instruments or the packaging together of existing financial instruments” . There is a general recognition of the particular importance of financial innovations for the wealth of a society.
This paper outlines the nature and main features of innovation in financial markets and suggests what factors may stimulate the apparent increase in the rate of innovation since the 1970s with a particular view on the role of banks. The final part discusses the question if financial innovations have been beneficial for borrowers and lenders?
Table of Contents
- Introduction
- Nature of Financial Innovation
- Stimuli for change
- Types and features of financial innovation
- Pilbeam's criteria of diversification
- Discussion: Have financial innovations been beneficial for borrowers and lenders?
- Conclusion
Objectives and Key Themes
This paper aims to provide a comprehensive overview of financial innovation, exploring its nature, key drivers, and potential benefits for borrowers and lenders. It focuses on the evolution of financial markets since the 1970s, with particular emphasis on the role of banks.
- Nature and Features of Financial Innovation
- Stimuli for Change in Financial Markets
- Impact of Deregulation and Technological Advancements
- Role of Financial Institutions in Innovation
- Benefits and Challenges of Financial Innovation for Borrowers and Lenders
Chapter Summaries
- Introduction: This chapter introduces the concept of financial innovation and its historical significance, highlighting the acceleration of change in financial markets since the 1970s. It also presents various definitions of financial innovation and its crucial role in economic growth.
- Nature of Financial Innovation: This chapter delves into the core characteristics of financial innovation, emphasizing four key aspects: spectrum filling, creation of new marketable assets, rebundling and unbundling of services, and internationalization of products and suppliers.
- Stimuli for Change: This chapter explores the drivers of financial innovation, focusing on the impact of regulatory changes, technological advancements, globalisation, increased volatility, and rising wealth and per capita income. It examines how these factors have contributed to the rapid pace of innovation in recent decades.
Keywords
Financial innovation, financial markets, deregulation, technological advancement, globalisation, risk management, financial intermediation, financial instruments, borrowers, lenders.
- Quote paper
- Volker Schmid (Author), 2004, Financial Innovation - with a particular view on the role of banks, Munich, GRIN Verlag, https://www.grin.com/document/28594
