Financial Innovation in Banking

Francesca Arnaboldi and Bruno Rossignoli

Chapter 5 in Bank Risk, Governance and Regulation, 2015, pp 127-162 from Palgrave Macmillan

Abstract: Abstract Innovation has been a core topic for scholars, because of its important contribution to economic growth and to the stability of financial systems (Levine, 1997; IMF, 2006; Lerner and Tufano, 2011). New financial products, such as the securitisation of assets, were believed to have tremendous potential for the diversification and efficient management of risk (Merton, 1992; Mendoza et al., 2009; Trichet, 2009). The financial crisis that started in 2007 changed those beliefs, as excessive risk-taking in some specialized innovating products brought down the financial system and produced the deepest and most prolonged economic crisis since the Great Depression. Recent studies now blame excessive growth of the financial economy as detrimental to the growth of the real economy (Levine, 2005; Rajan, 2005; Piazza, 2010; Shin, 2010; Johnson and Kwak, 2012). Innovation is a double-edged sword: the right kind of innovation and favourable conditions that may spur banks to invest in new technologies would help the financial system fulfil its functions and, as a consequence, deliver growth; but too much innovation or innovation that is not properly used, can have serious consequences for the overall economy (Stiglitz, 2010; Beck et al., 2012).

Keywords: Gross Domestic Product; Total Asset; Banking System; Financial Innovation; Islamic Bank (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-1-137-53094-3_5

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DOI: 10.1057/9781137530943_5

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