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Financial Innovation and the Management and Regulation of Financial Institutions

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  • Robert C. Merton

Abstract

New security designs, improvements in computer telecommunications technology and advances in the theory of finance have led to revolutionary changes in the structure of financial markets and institutions. This paper provides a functional perspective on the dynamics of institutional change and uses a series of examples to illustrate the breadth and depth of institutional change that is likely to occur. These examples emphasize the role of hedging versus equity capital in managing risk, the need for risk accounting and changes in methods for implementing both regulatory and stabilization public policy.

Suggested Citation

  • Robert C. Merton, 1995. "Financial Innovation and the Management and Regulation of Financial Institutions," NBER Working Papers 5096, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5096
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    References listed on IDEAS

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    1. James L. Pierce, 1993. "The functional approach to deposit insurance and regulation," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 37, pages 111-130.
    2. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
    3. John D. Finnerty, 1992. "An Overview Of Corporate Securities Innovation," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 23-39.
    4. Sanford J. Grossman & Oliver D. Hart, 1982. "Corporate Financial Structure and Managerial Incentives," NBER Chapters,in: The Economics of Information and Uncertainty, pages 107-140 National Bureau of Economic Research, Inc.
    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    6. Robert C. Merton & André Perold, 1993. "Theory Of Risk Capital In Financial Firms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(3), pages 16-32.
    7. Charles S. Sanford, 1993. "Financial markets in 2020," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 227-243.
    8. Merton, Robert C. & Bodie, Zvi, 1993. "Deposit insurance reform: a functional approach," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 1-34, June.
    9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    10. Robert C. Merton, 1992. "Financial Innovation And Economic Performance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 12-22.
    11. Stiglitz, Joseph E, 1988. "Money, Credit, and Business Fluctuations," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 307-322, December.
    12. Michael R. Darby, 1994. "Over-the-Counter Derivatives and Systemic Risk to the Global Financial System," NBER Working Papers 4801, National Bureau of Economic Research, Inc.
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