How financial innovation might cancel out bank regulation along financial cycles. A Keynes's state of confidence interpretation

Konstantinos Loizos

No PKWP1403, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: The question posed in this paper is how financial innovation may render conventional bank regulation ineffective. It is argued that the root cause as well as the essence of financial innovation is the predominance of trust in the financial markets, as it is confidence in the financial markets which makes the acceptance of financial innovation possible. In particular, mutual trust in the interbank market depends on the degree of confidence by which expectations are held, which, in turn, affects the relevant risk premia. Consequently, bank regulation may fail to accomplish its stabilization purpose if it cannot check overconfidence in the upswing or inspire and redress lack of confidence in the downturn.

Keywords: Financial innovation; bank regulation; state of confidence; financial cycles (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Pages: 30
Date: 2014-02
New Economics Papers: this item is included in nep-ban and nep-cba
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