Regulation of Financial Innovation Stability vs. Progress?
32 Pages Posted: 21 Apr 2016
Date Written: April 19, 2016
This paper analyzes the impact of financial regulation on the process of financial innovation. We use a discrete investment choice model to examine the potential trade-off between a more innovative and a more stable financial system, which regulators might face when intervening in the process of financial innovation. While the trade-off holds in a simple setting, it can break when inefficiencies are added into the model. We find clumping behavior and preemptive moves as two examples of inefficiencies that break the trade-off. Regulators can combat those inefficiencies and thereby improve both innovativeness and stability at the same time.
Keywords: Financial Innovation, Financial Regulation, Equity Requirements, Growth, Instability
JEL Classification: G28, O31, O43, D60
Suggested Citation: Suggested Citation