Transcript 7-5 Future trend of financial innovation

Future Trend of Financial
Innovation
周行一 Edward H. Chow
國立政治大學財務管理學系所教授
Professor of Finance
商學院 院長
Dean of College of Commerce
2008/5
Outline
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Definition of innovation
Functional taxonomy of financial
innovation
Financial innovation originates
from market imperfections
A local financial innovation
Conclusion
Definition of innovation
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Webster’s Collegiate Dictionary: to
introduce as or as if new
Most innovations are about improving
existing products and process
Definition of innovation
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Miller (1992) argued that true
innovations should have lasting impacts：
futures contracts and cash settlement
Financial innovation originates
from market imperfections
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incomplete markets
tax
regulatory constraints
information asymmetry induces agency
problem
Financial innovation originates
from market imperfections
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transaction cost
moral hazard
globalization
risk
NO ONE explanation works
Ironically, sometimes financial
innovation would aggravate the
very causes for innovation
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Financial innovations related to the subprime problem
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Financial institutions wanted to reduce risk
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SIV and securitization
Financial institutions wanted to make money
The subprime crisis spread at a global scale
The subprime products were much riskier than
people had expected
The subprime crisis resulted from moral hazard
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Financial institutions bought products based on credit ratings
and did not bother to worry about liquidity risk and valuation
Ironically, sometimes financial
innovation would aggravate the
very causes for innovation
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Structured products sold to retail clients
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Clients (probably financial advisors too) do not
understand the complicated structure of the
products
Financial institutions wanted to make money
The structured products were much riskier
than people had expected
The dispute between sellers and clients
resulted from agency problem
The future trend of financial
innovation
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Transparency will be crucial
More likely products will be designed based on liquid underlying
assets
US and European financial institutions will be scrutinized more
for their financial products—Regulators will focus on
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Transparency
Liquidity
Valuation
Governance of Institutions designing products will be stressed
Product designer will be look to
behavioral finance more and more
Financial e-commerce
A local Taiwanese financial
innovation—Internet Huei
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Shacom.com created the Internet Huei
It is a kind of traditional Huei without Huei Shou
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There is bidding on the first allocation date
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Participants are guaranteed by the bank
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The Bank is responsible for clearing and settlement
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Borrowers and Lenders determine their own
interest rate
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Participants who bid early are likely borrowers
Participants who bid later are likely lenders
Borrowers and lenders share the traditional loandeposit interest spread
A local Taiwanese financial
innovation—Internet Huei
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The Internet Huei is a type of e-commerce
The innovation is protected by many patents
The innovation is in “the process of bidding to
determine interest rate” and the clearing and
settlement mechanism
The innovation overcomes the shortcomings of
traditional Huei
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Default risk
Liquidity
interest rate references
Huei Shou advantage
Conclusion
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Thank you for your attention