Proceedings

1. THE COMPLEX PROCESS OF FINANCIAL INOVATION
“Innovate” is defined in Webster’s Collegiate Dictionary as “to introduce as or as if
new,” with the root of the word deriving from the Latin word “novus” or new.
Economists use the word “innovation” in an expansive fashion to describe shocks to
the economy (e.g., “monetary policy innovations”) as well as the responses to these
shocks (e.g., Euro deposits).
The “innovations” are sometimes divided into product or process innovation, with
product innovations exemplified by new derivative contracts, new corporate securities
or new forms of pooled investment products, and process improvements typified by
new means of distributing securities, processing transactions, or pricing transactions.
Financial innovation, process innovation as well as product innovation (representing
the diversification and modernization of the financial products already existing on the
capital markets) is vectors of the financial liberalization. The expected results of the
financial innovation usually regard the economic growth. Their efficiency can be
estimated in direct causal relation, by measuring the changes of those growth ratios.
Financial innovation is in fact a way of diversifying the investment possibilities for
the financial resources existing in the real economic world. In this context, financial
globalization can be regarded as a filter placed either before the results (when we have
an amplifying effect) or after them, making the efficiency judgments regarding the
financial innovation used very difficult (dilution effect).
The innovations in the financial field do not imply obligatory new products or
services, being also associated to the changes that are done to the existing products
and services, in order to make them more suitable to the demands of a continuously
changes of the market. As a consequence, the financial innovation is a continuous
process, the financial institutions being both interested and stimulated to improve their
products and services in order to fulfill the client’s needs and increase their profits.
Merton (1992) invented the concept of „spiral financial innovation” to describe how
such new financial products satisfy the demand existing on a certain market,
generating new financial products and new markets where these financial products are
being sold and bought. The new financial instruments allow the new investors to
diversify their portfolios and to control the risk through an advanced management that
implies the use of derivatives financial instruments. Another innovation refers to the
coming into being of structured finance (complex financial instruments) that has
stimulated the growth of the capital markets. The new financial instruments allow the
investors to diversify the risk associated to investments. A significant innovation was
the transformation of illiquid actives, especially mortgage and consumption credits,
into liquid exchange securities that are being exchanged on the capital markets.
One sub-branch of the literature on financial innovation has created lists or
taxonomies of innovations. For example, Finnerty (1988, 1992, 2001) has created a
list of over 60 securities innovations, organized by broad type of instrument (debt,
preferred stock, convertible securities, and common equities) and by the function
served (reallocating risk, increasing liquidity, reducing agency costs, reducing
transactions costs, reducing taxes or circumventing regulatory constraints.)
~ 318 ~