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Financial innovation oversight: a policy framework

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  • Gola Carlo

    ()
    (Bank of Italy)

  • Ilari Antonio

    ()
    (Bank of Italy)

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    Abstract

    This paper proposes a policy framework for intercepting, monitoring and containing the unintended harmful effects of financial innovation. The current approach, adopted by several authorities, makes extensive use of the tools of transparency and disclosure, mainly for consumer protection. It has been increasingly recognized that this approach needs to be supplemented with more stringent organizational solutions, which mainly include corporate governance and risk management. This also comprises responsible risk culture, ethical standards, appropriate incentive structure, accountability, and internal controls, which are related more to “process innovation” than to “product innovation”. In addition to retail financial products, the policy framework also deal with the harmful effects of complex and bespoke financial contracts. This paper gives some practical examples of internal governance procedures and suggests a system-wide monitoring method for structured products. It also discusses some more intrusive policy options, including product preapproval and prohibitions.

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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 200.

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    Date of creation: Sep 2013
    Date of revision:
    Handle: RePEc:bdi:opques:qef_200_13

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    Web page: http://www.bancaditalia.it
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    Related research

    Keywords: Financial innovation; banking supervision; oversight; financial crisis; corporate governance; behavioural economics;

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    References

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    17. Stoimenov, Pavel A. & Wilkens, Sascha, 2005. "Are structured products 'fairly' priced? An analysis of the German market for equity-linked instruments," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2971-2993, December.
    18. Stephen Lumpkin, 2009. "Regulatory issues related to financial innovation," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2009(2), pages 1-31.
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