Technological Change, Financial Innovation, and Financial Regulation in the U.S.: The Challenges for Public Policy
Posted: 28 Jan 1997
Date Written: August 1996
The financial services sector in the United States is experiencing an era of rapid innovation. These changes are fueled by the rapid improvements in the two technologies - data processing and telecommunications - that are at the heart of financial services. The financial services sector is also one of the most heavily regulated sectors in the U.S. Economy - despite two decades of widespread deregulation. Though technological improvements and innovations are almost always healthy and beneficial for an economy, they can place serious strains on the incumbents in a particular industry or sector on which they are focused, and they may create challenges for public policy, especially in a heavily regulated industry. This has certainly been true for financial services. Further, the heavy overlay of government regulation on the financial services sector has certainly influenced the course of financial innovation and, in turn, been influenced by it. This paper will provide an overview of these interactions between financial innovation and financial regulation. Regulation clearly can be a hindrance to innovation; sometimes it may be a spur to innovation. And actual or prospective innovation may, in turn, be an important precursor to subsequent regulation. The social welfare consequence of these complex interactions, and the implications for the development of public policy, are themselves a challenge to disentangle; but an understanding of the processes of innovation and of regulation can clarify the interactions and thus help to structure the public policy debate.
JEL Classification: G21
Suggested Citation: Suggested Citation