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Financial Innovation and Shadow Banking

In: The Social Value of the Financial Sector Too Big to Fail or Just Too Big?

Author

Listed:
  • Luc Laeven

    (International Monetary Fund, USA and Centre for Economic Policy Research (CEPR), UK)

Abstract

There are bright and dark sides to financial innovation. On the bright side, financial innovations that improve screening and monitoring can facilitate the allocation of resources by financial intermediaries to their most productive use (Greenwood, Sanchez, and Wang, 2010; Laeven, Levine, and Michalopoulos, 2012). Notable examples of such productive forms of financial innovation in the past include credit bureaus and venture capital. Financial innovations that improve risk-sharing can, in principle, also be welfare enhancing. A good example is derivatives in their various forms and colors. However, financial innovations can be “deadly weapons” if abused, allowing financial institutions to further boost excessive leverage and contributing to systemic risk. The same derivatives that can improve risk-sharing can also harbor very large tail risks that can jeopardize individual financial intermediaries that engage in ill-managed derivatives trades and with it the entire financial system…

Suggested Citation

  • Luc Laeven, 2013. "Financial Innovation and Shadow Banking," World Scientific Book Chapters, in: Viral V Acharya & Thorsten Beck & Douglas D Evanoff & George G Kaufman & Richard Portes (ed.), The Social Value of the Financial Sector Too Big to Fail or Just Too Big?, chapter 12, pages 229-235, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814520294_0012
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    Cited by:

    1. Hodula, Martin & Libich, Jan, 2023. "Has monetary policy fueled the rise in shadow banking?," Economic Modelling, Elsevier, vol. 123(C).

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