Financial Innovation Oversight: A Policy Framework
48 Pages Posted: 19 Dec 2013
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Financial Innovation Oversight: A Policy Framework
Financial Innovation Oversight: A Policy Framework
Date Written: September 27, 2013
Abstract
This paper proposes a policy framework for intercepting, monitoring and containing the unintended harmful effects of financial innovation. The current approach, adopted by several authorities, makes extensive use of the tools of transparency and disclosure, mainly for consumer protection. It has been increasingly recognized that this approach needs to be supplemented with more stringent organizational solutions, which mainly include corporate governance and risk management. This also comprises responsible risk culture, ethical standards, appropriate incentive structure, accountability, and internal controls, which are related more to “process innovation” than to “product innovation”. In addition to retail financial products, the policy framework also deal with the harmful effects of complex and bespoke financial contracts. This paper gives some practical examples of internal governance procedures and suggests a system-wide monitoring method for structured products. It also discusses some more intrusive policy options, including product preapproval and prohibitions.
Keywords: Financial innovation, banking supervision, oversight, financial crisis, corporate governance, behavioural economics
JEL Classification: G00, G01, G3, G18, O31
Suggested Citation: Suggested Citation