FINANCIAL INNOVATION AND CRISIS

Financial Innovation and Crisis

Financial Innovation and Crisis

Introduction

It is generally considered that the financial crisis was caused by the excesses of actors in the world of finance. They made ??loans to subprime households insufficiently creditworthy, they developed financial instruments too complex, they forgot all risks in seeking to make profits at any cost. This behavior of the bankers would have been permitted by a lack of regulation. To avoid such crises in future, we must give more power to regulators. It requires more interventionism. However, the reality is less straightforward. Indeed, one can also consider that the crisis has, at least in part, been caused by acts of interventionism. Regulators would, at least in part responsible for this crisis.

The lack of Regulation

Poor risk assessment, the unconsciousness of the financial actors, what are the causes cited for the financial crisis. The excesses of financial players are charged, who have gone too far, to maximize profits, ignoring the risks. Now, we have seen that these excesses, these indiscretions, which led to the financial crisis, were allowed by regulatory bodies. It is the lack of supervision of the behavior of financial players by rules that is in question.

We often talk about deregulation. It is true that in recent years have seen an easing of regulations in the United States. The symbol of this financial deregulation, this is perhaps the Gramm-Leach-Bliley Act in 1999, which is the law which repealed the Glass-Steagall Act, which dated from 1933. The latter separated the commercial banking activities (retail banking, business, that sells credit), investment banking (which speculates on the markets, manufactures sophisticated products, launches of securities markets), and insurance. All financial institutions have developed the same activities. Considering that, increased competition has led to excessive risk taking. (Actually, there have been several laws that have gradually relaxed the-Steagall act. However, the date of 1999 is symbolic.) However, this is not so much deregulation is implicated in the financial crisis, the lack of regulation. Indeed, the development of new financial instruments should not just relaxed regulation. This is primarily a movement of innovation, facilitated by new technologies. IT has to better manage complex financial instruments, such as derivatives based on certain mathematical models (Andrews 2009, 193-218).

In short, the bottom line is that there was a movement of financial innovation, and we consider that the regulation did not follow this movement. New products were created, which were supervised by any specific legislation. Thus, there were no specific regulations for derivatives. Similarly, we consider that hedge funds have too much freedom. This lack of regulation also results from willingness on the part of the U.S. government, including the Federal Reserve. There were opportunities to regulate derivatives, for example, or the CDS (credit default swap, another new product).

In Australia, since the 1980s, financial markets have also developed under the leadership of the State. It was to create products and markets that were already abroad, to make the Australian financial with international ...