Big data Analytics in the financial sector

In a recent article by the Wall Street Journal (http://blogs.wsj.com/cio/2014/01/03/the-data-product-era-begins-in-financial-services/), Thomas Davenport alerts society about the proliferation of big data analytics in the financial sector. This got me thinking about what this means in terms of governance and the ethical issues we need to start thinking about. Fortunately there is a lot of on-going research work in this area, but the extent to which these consider implications on the financial sector  is still unclear.

 

What is a Dangerous Financial Innovation?

http://www.investing.com/news/economy-news/rental-backed-securities—a-dangerous-financial-innovation%20-262392

In this recent article by the International Business Times, we can  understand concerns of one of society’s leaders regarding the extent to which financial innovation – using one case example, rental-backed securities – is beneficial or harmful to society. I find this a difficult challenge for financial innovation. Recent research that I have been carrying out in this field has led me to question what we mean when we say a particular financial innovation is dangerous? Apart from complex financial products derived from securitization which are considered harmful because of their complexity and systemic risk features, what are the other dangerous financial products/services that exist? Are Asset-Backed Securities and the like only dangerous because of complexity and systemic risk? What about everyday banking and investment products – are these less harmful because they are simpler? If yes, what about pay day loans and micro-finance schemes that can take advantage of people?

What constitutes risk in financial innovation as unlike other form of innovation (e.g. technological and scientific innovation where risk can be assessed in terms of impact on health and environment), risk is difficult to conceptualize. Do financial innovations impact health and the environment at all? What is the basis for assessing risks and what kind of questions do financial innovators need to be asking? It is my believe that a focus on exploring and attempting to answer some of these fundamental questions is a step in the right direction if we are to deal with financial instability in the future.

 

The Inevitability of Instability

http://www.economist.com/news/finance-and-economics/21595010-welcome-burst-new-thinking-financial-regulation-inevitability

I was really happy to recently read an article (in the link above) on the inevitable nature of events like the financial crises in the Economist. This is because, it is my opinion that this way of thinking lays the foundation for better management of these in future. When actors in the industry begin to acknowledge that there is a limit to what they foresee and predict, they begin to put in place better institutions and mechanisms to mitigate these unforeseeable events. The fact however still remains that stakeholders still focus to a large extent on using regulation as a mechanism for addressing these and this was evident in the article with various commentators suggesting a safety net approach, insurance etc. We should remember that regulation is just one form of governance mechanism; and in the case of the financial crises where individual responsibility is crucial, there is a need to combine regulation with other forms of multi-level governance mechanisms within organizations in a way that encourages responsible behaviour in a voluntary way.

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