Financial Innovation Oversight: A Policy Framework

48 Pages Posted: 19 Dec 2013

Multiple version iconThere are 2 versions of this paper

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

Gola, Carlo and Ilari, Antonio, Financial Innovation Oversight: A Policy Framework (September 27, 2013). Bank of Italy Occasional Paper No. 200, Available at SSRN: https://ssrn.com/abstract=2369315 or http://dx.doi.org/10.2139/ssrn.2369315

Carlo Gola (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Antonio Ilari

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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