How Financial Innovation Might Cancel Out Bank Regulation Along Financial Cycles. A Keynes’s State of Confidence Interpretation
AbstractThe 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.
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Bibliographic InfoPaper provided by Post Keynesian Economics Study Group (PKSG) in its series Working Papers with number PKWP1403.
Length: 33 pages
Date of creation: Feb 2014
Date of revision:
Financial Innovation; Bank Regulation; State of Confidence; Financial Cycles;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-03-15 (All new papers)
- NEP-BAN-2014-03-15 (Banking)
- NEP-CBA-2014-03-15 (Central Banking)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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