What is a Dangerous Financial Innovation?


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.


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