Abstract

http://ssrn.com/abstract=1991216
 
 

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Financial Innovation: The Bright and the Dark Sides


Thorsten Beck


City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Tao Chen


Nanyang Technological University (NTU) - Division of Banking & Finance

Chen Lin


University of Hong Kong - Faculty of Business and Economics

Frank M. Song


University of Hong Kong - School of Economics and Finance

January 2014


Abstract:     
“Everybody talks about financial innovation, but (almost) nobody empirically tests hypotheses about it”. Frame and White (2004)

The financial turmoil from 2007 onwards has spurred renewed debates on the “bright” and “dark” sides of financial innovation. Using bank-, industry- and country-level data for 32, mostly high-income, countries between 1996 and 2006, this paper is the first to explicitly assess the relationship between financial innovation in the banking sector and (i) real sector growth, (ii) real sector volatility, and (iii) bank fragility. We find evidence for both bright and dark sides of financial innovation. On the one hand, we find that a higher level of financial innovation is associated with a stronger relationship between a country’s growth opportunities and capital and GDP per capita growth and with higher growth rates in industries that rely more on external financing and depend more on innovation. On the other hand, we find that financial innovation is associated with higher growth volatility among industries more dependent on external financing and on innovation and with higher idiosyncratic bank fragility, higher bank profit volatility and higher bank losses during the recent crisis.

Number of Pages in PDF File: 82

Keywords: Financial Innovation, Financial R&D Intensity, Bank Risk Taking, Financial Crisis, Industrial Growth, Finance and Growth

JEL Classification: G2, G15, G28, G01, O3

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Date posted: January 25, 2012 ; Last revised: July 29, 2014

Suggested Citation

Beck, Thorsten and Chen, Tao and Lin, Chen and Song, Frank M., Financial Innovation: The Bright and the Dark Sides (January 2014). Available at SSRN: http://ssrn.com/abstract=1991216 or http://dx.doi.org/10.2139/ssrn.1991216

Contact Information

Thorsten Beck
City University London - Sir John Cass Business School ( email )
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
Tilburg University - European Banking Center, CentER ( email )
PO Box 90153
Tilburg, 5000 LE
Netherlands
Tao Chen
Nanyang Technological University (NTU) - Division of Banking & Finance ( email )
S3-B1A-08 Nanyang Avenue
Singapore, 639798
Singapore
Chen Lin (Contact Author)
University of Hong Kong - Faculty of Business and Economics ( email )
Pokfulam Road
Hong Kong
China
Frank M. Song
University of Hong Kong - School of Economics and Finance ( email )
8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
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