IDEAS home Printed from https://ideas.repec.org/p/bng/wpaper/15001.html
   My bibliography  Save this paper

The determinants of regulatory responses to risks from financial innovation: Survey evidence from G20

Author

Listed:
  • Ivan Diaz-Rainey

    (University of Otago)

  • John Ashton

    (Bangor University)

  • Maz Yap

    (University of Otago)

  • Murat Genc

    (University of Otago)

  • Rosalind Whiting

    (University of Otago)

Abstract

We explore the factors that shape the extent and scope of the response of G20 countries to a Financial Stability Board (FSB) recommendation aimed at mitigating the risks from financial innovation. Using a formal content analysis of the FSBÕs Implementation Monitoring Network Surveys, we develop an index of disclosed strength of regulatory responses. We find that G20 countries have displayed large interpretive differences, little forward planning and have emphasized regulatory capabilities over firm capabilities when addressing the recommendation. Countries with strong central banks, more concentrated regulatory structures and bank-based financial systems responded more robustly, while countries with a large financial sector were marginally associated with a weaker response. The latter suggests that financial sector lobbying has weakened regulatory responses.

Suggested Citation

  • Ivan Diaz-Rainey & John Ashton & Maz Yap & Murat Genc & Rosalind Whiting, 2015. "The determinants of regulatory responses to risks from financial innovation: Survey evidence from G20," Working Papers 15001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  • Handle: RePEc:bng:wpaper:15001
    as

    Download full text from publisher

    File URL: http://www.bangor.ac.uk/business/research/documents/BBSWP-15-01.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. W. Scott Frame & Lawrence J. White, 2004. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 116-144, March.
    2. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2011. "Market Freedom and the Global Recession," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(1), pages 111-135, April.
    3. Miwa, Yoshiro & Ramseyer, J. Mark, 2006. "The Fable of the Keiretsu," University of Chicago Press Economics Books, University of Chicago Press, number 9780226532707, January.
    4. Esmeralda A. Ramalho & Joaquim J. S. Ramalho & José M. R. Murteira, 2014. "A Generalized Goodness-of-functional Form Test for Binary and Fractional Regression Models," Manchester School, University of Manchester, vol. 82(4), pages 488-507, July.
    5. Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, vol. 55(3), pages 309-324, April.
    6. Philip Molyneux & Nidal Shamroukh, 1996. "Diffusion of financial innovations: the case of junk bonds and note issuance facilities," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 502-526.
    7. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    8. Takeo Hoshi & Anil K. Kashyap, 2004. "Japan's Financial Crisis and Economic Stagnation," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 3-26, Winter.
    9. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2012. "External adjustment and the global crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 252-265.
    10. Jean-Jacques Laffont & Jean Tirole, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1089-1127.
    11. Ana Fostel & John Geanakoplos, 2012. "Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 190-225, January.
    12. Ivan Diaz-Rainey & Gbenga Ibikunle, 2012. "A taxonomy of the 'dark side' of financial innovation: the cases of high frequency trading and exchange traded funds," International Journal of Entrepreneurship and Innovation Management, Inderscience Enterprises Ltd, vol. 16(1/2), pages 51-72.
    13. David Martimort, 1999. "The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(4), pages 929-947.
    14. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    15. Mr. Fabian Valencia & Mr. Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 2008/224, International Monetary Fund.
    16. Miller, Merton H., 1986. "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 459-471, December.
    17. Vivien Beattie & Sarah Jane Thomson, 2007. "Lifting the lid on the use of content analysis to investigate intellectual capital disclosures," Accounting Forum, Taylor & Francis Journals, vol. 31(2), pages 129-163, June.
    18. Thakor, Anjan V., 2012. "Incentives to innovate and financial crises," Journal of Financial Economics, Elsevier, vol. 103(1), pages 130-148.
    19. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
    20. Merton, Robert C., 1995. "Financial innovation and the management and regulation of financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 461-481, June.
    21. Esmeralda A. Ramalho & Joaquim J.S. Ramalho & José M.R. Murteira, 2011. "Alternative Estimating And Testing Empirical Strategies For Fractional Regression Models," Journal of Economic Surveys, Wiley Blackwell, vol. 25(1), pages 19-68, February.
    22. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    23. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    24. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    25. Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert, 2012. "Neglected risks, financial innovation, and financial fragility," Journal of Financial Economics, Elsevier, vol. 104(3), pages 452-468.
    26. Josh Lerner & Peter Tufano, 2011. "The Consequences of Financial Innovation: A Counterfactual Research Agenda," NBER Chapters, in: The Rate and Direction of Inventive Activity Revisited, pages 523-575, National Bureau of Economic Research, Inc.
    27. Luisa Zanforlin & Ian Tower & Erlend Nier & Michael Moore & Ana Carvajal & Randall Dodd, 2009. "The Perimeter of Financial Regulation," IMF Staff Position Notes 2009/07, International Monetary Fund.
    28. A. Colin Cameron & Pravin K. Trivedi, 2010. "Microeconometrics Using Stata, Revised Edition," Stata Press books, StataCorp LP, number musr, March.
    29. Rainer Winkelmann, 2008. "Econometric Analysis of Count Data," Springer Books, Springer, edition 0, number 978-3-540-78389-3, January.
    30. Kim, Teakdong & Koo, Bonwoo & Park, Minsoo, 2013. "Role of financial regulation and innovation in the financial crisis," Journal of Financial Stability, Elsevier, vol. 9(4), pages 662-672.
    31. Henderson, Brian J. & Pearson, Neil D., 2011. "The dark side of financial innovation: A case study of the pricing of a retail financial product," Journal of Financial Economics, Elsevier, vol. 100(2), pages 227-247, May.
    32. Dittmann, I. & Maug, E. & Schneider, Christoph, 2010. "Bankers on boards of German firms : What they do, what they are worth, and why they are (still) there," Other publications TiSEM 610cf1b5-ae96-4112-9ff3-9, Tilburg University, School of Economics and Management.
    33. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2013. "Corporate lobbying, political connections, and the bailout of banks," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3007-3017.
    34. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, February.
    35. Van Horne, James C, 1985. "Of Financial Innovations and Excesses," Journal of Finance, American Finance Association, vol. 40(3), pages 621-631, July.
    36. Demirguc-Kunt, Asli & Levine, Ross, 1999. "Bank-based and market-based financial systems - cross-country comparisons," Policy Research Working Paper Series 2143, The World Bank.
    37. Stijn Claessens, 2010. "The Financial Crisis," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 4(2), pages 177-196, May.
    38. Mr. Stijn Claessens & Mr. Luc Laeven & Ms. Deniz O Igan & Mr. Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications from the Global Financial Crisis," IMF Working Papers 2010/044, International Monetary Fund.
    39. Franks, Julian & Mayer, Colin, 1998. "Bank control, takeovers and corporate governance in Germany," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1385-1403, October.
    40. Ms. Luisa Zanforlin & Ian Tower & Erlend Nier & Michael Moore & Ana Carvajal & Randall Dodd, 2009. "The Perimeter of Financial Regulation," IMF Staff Position Notes 2009/007, International Monetary Fund.
    41. Franklin Allen, 2012. "Trends in Financial Innovation and their Welfare Impact: an Overview," European Financial Management, European Financial Management Association, vol. 18(4), pages 493-514, September.
    42. Franklin Allen, 2012. "Trends in Financial Innovation and Their Welfare Impact: An Overview," DNB Working Papers 355, Netherlands Central Bank, Research Department.
    43. Ingolf Dittmann & Ernst Maug & Christoph Schneider, 2010. "Bankers on the Boards of German Firms: What They Do, What They Are Worth, and Why They Are (Still) There," Review of Finance, European Finance Association, vol. 14(1), pages 35-71.
    44. Randall Morck & Masao Nakamura, 1999. "Banks and Corporate Control in Japan," Journal of Finance, American Finance Association, vol. 54(1), pages 319-339, February.
    45. Mr. Fabian Valencia & Mr. Luc Laeven, 2012. "Systemic Banking Crises Database: An Update," IMF Working Papers 2012/163, International Monetary Fund.
    46. Donato Masciandaro, 2006. "E Pluribus Unum? Authorities' Design in Financial Supervision: Trends and Determinants," Open Economies Review, Springer, vol. 17(1), pages 73-102, January.
    47. Gropper, Daniel M. & Jahera, John S. & Park, Jung Chul, 2013. "Does it help to have friends in high places? Bank stock performance and congressional committee chairmanships," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1986-1999.
    48. Stijn Claessens & Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2010. "Cross-country experiences and policy implications from the global financial crisis [From Great Depression to Great Credit Crisis: Similarities, differences and lessons]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 25(62), pages 267-293.
    49. Kevin Young, 2012. "Transnational regulatory capture? An empirical examination of the transnational lobbying of the Basel Committee on Banking Supervision," Review of International Political Economy, Taylor & Francis Journals, vol. 19(4), pages 663-688.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tamer Khraisha & Keren Arthur, 2018. "Can we have a general theory of financial innovation processes? A conceptual review," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-27, December.
    2. W. Scott Frame & Lawrence J. White, 2009. "Technological change, financial innovation, and diffusion in banking," FRB Atlanta Working Paper 2009-10, Federal Reserve Bank of Atlanta.
    3. Kauffman, Robert J. & Liu, Jun & Ma, Dan, 2015. "Innovations in financial IS and technology ecosystems: High-frequency trading in the equity market," Technological Forecasting and Social Change, Elsevier, vol. 99(C), pages 339-354.
    4. Hamid Mohtadi & Stefan Ruediger, 2014. "Volatility and Transparency of Financial Markets in the MENA Region," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 173-195, March.
    5. Mehmet Balcilar & Riza Demirer, 2014. "The Effect of Global Shocks and Volatility on Herd Behavior in Borsa Istanbul," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 142-172, March.
    6. Fabian Kuehnhausen, 2014. "The Impact of Financial Innovation on Firm Stability," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 211-239, March.
    7. Suleyman Hilmi Kal & Nuran Arslaner & Ferhat Arslaner, 2014. "Inflation Dynamics and Business Cycles," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 121-129, March.
    8. W. Scott Frame & Larry Wall & Lawrence J. White, 2018. "Technological Change and Financial Innovation in Banking: Some Implications for FinTech," Working Papers 18-28, New York University, Leonard N. Stern School of Business, Department of Economics.
    9. Guzin Gulsun Akin & Ahmet Faruk Aysan & Gültekin Gollu & Levent Yildiran, 2014. "Formal and Informal Regulations for Credit Card Payment Services," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 1-33, March.
    10. Antonina Waszczuk, 2014. "Assembling International Equity Datasets – Review of Studies on the Cross-Section of Common Stocks," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 34-65, March.
    11. Sezer Bozkus Kahyaoglu & M. Vedat Pazarlioglu, 2014. "Hedging Strategy for Electricity Market Price Volatility: The Case of Turkish Electricity Market," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 196-210, March.
    12. Ahmet Duran & Burhaneddin Izgi, 2014. "Comovement and Polarization of Interest Rate and Stock Market in Turkey," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 130-141, March.
    13. Ege Yazgan, 2014. "The effect of investors' confidence on monetary policy- economic growth relationship: a Multivariate GARCH approach," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 82-109, March.
    14. Orhan Erdem & Evren Arik & Serkan Yuksel, 2014. "Trading Puzzle," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 66-81, March.
    15. Sadettin Haluk Citci, 2014. "Agency and Transparency in Financial Markets," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 110-120, March.
    16. Beck, Thorsten & Chen, Tao & Lin, Chen & Song, Frank M., 2016. "Financial innovation: The bright and the dark sides," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 28-51.
    17. Hasan Cömert & Gerald Epstein, 2016. "Finansal Yenilik Yazinindaki Son Gelismeler," STPS Working Papers 1604, STPS - Science and Technology Policy Studies Center, Middle East Technical University, revised Jan 2016.
    18. Kim, Teakdong & Koo, Bonwoo & Park, Minsoo, 2013. "Role of financial regulation and innovation in the financial crisis," Journal of Financial Stability, Elsevier, vol. 9(4), pages 662-672.
    19. Laeven, Luc & Levine, Ross & Michalopoulos, Stelios, 2015. "Financial innovation and endogenous growth," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 1-24.
    20. John Armour & B.R. Cheffins & D.A. Skeel Jr., 2002. "Corporate Ownership Structure and the Evolution of Bankruptcy Law in the US and UK," Working Papers wp226, Centre for Business Research, University of Cambridge.

    More about this item

    Keywords

    inancial innovation; financial regulation; Global Financial Crisis; G20; Financial Stability Board;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bng:wpaper:15001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alan Thomas (email available below). General contact details of provider: https://edirc.repec.org/data/sabanuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.