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Innovation & Regulation: Some Preliminary Observations

In: Achieving Financial Stability Challenges to Prudential Regulation

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  • Michael S. Barr

Abstract

Innovation is inherently disruptive, helping to catalyze growth and new opportunities, while also generating new risks. The introduction of innovative financial products gives rise to cycles of boom and bust, trial and error, as both regulators and market participants seek to balance benefits and risks appropriately. New products often develop slowly while market participants are unsure of their value or their risks. As they develop and grow rapidly, however, excitement and enthusiasm can overwhelm risk management. Participants may assume too soon that they really understand the new product and the market, and widely use new products without sufficient thought to new and often riskier contexts. When the excessive risk-taking turns to widespread losses or harms, the cycle can turn back once again. Overall, this disruptive innovation benefits the economy as a whole, but only if regulatory guardrails help to protect against the worst outcomes for society, such as the Financial Crisis of 2008 (see Barr, 2012)…

Suggested Citation

  • Michael S. Barr, 2017. "Innovation & Regulation: Some Preliminary Observations," World Scientific Book Chapters, in: Douglas D Evanoff & George G Kaufman & Agnese Leonello & Simone Manganelli (ed.), Achieving Financial Stability Challenges to Prudential Regulation, chapter 17, pages 239-248, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813223400_0017
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    More about this item

    Keywords

    Money and Banking; International Banking; Financial Instititions; Banks; Regulations; Compliance; Financial Crisis; Great Financial Crisis 2008; Microprudential; Macroprudential; Financial Stability;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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