Technology, Regulation Likely to Spur More Financial Innovation
After taking a backseat to financial stability concerns since the financial crisis, financial innovation is poised for renewed prominence as long as there is not another systemic shock. To better understand how future innovation might unfold, Atlanta Fed economist Larry Wall recently examined two major sources of past innovation in banking services: regulation and technology.
Newer innovations praised, pilloried
"Innovative firms developed ways of avoiding these limits on competition that both boosted their profits and benefited the users of financial services," Wall writes.
Money market mutual funds, for example, overcame regulatory limits on interest paid to small investors, according to Wall.
Technology has fueled innovation in various ways
Finally, technological advances have been critical in obtaining and manipulating the mountains of data required to build statistical models, and in performing timely calculations of complex valuation and risk measurement formulas, Wall notes.
While technology will continue to spur financial innovation, regulation will probably play an even bigger role, Wall writes, chiefly because the variety and sheer volume of regulations enacted after the financial crisis—3,500 pages, by some measures—give financial services providers enormous incentive to innovate.
March 12, 2014