Financial Innovation Essay Example | Topics and Well Written Essays - 1250 words

Financial mutation - Essay ExampleEvidence adduced in this paper illustrates various instances of monetary psychiatric hospitals that exempted regulation. The consequence has been economic crisis. invention The performance of the monetary sector is crucial to the economy of the country. Innovation in the financial sector give the sack contribute to the growth or destruction of the economy. The economic growth over the past few centuries border that effective approach to financial institution could create prosperity of the nations. However, the issue of financial innovation has raddled criticism from some economists who believe that frequent economic crises experienced in the recent years be due to financial innovation. This paper seeks to debate the question should the potential benefits of financial system innovation warn regulators from imposing restrictions on the activities of financial intromissions. Financial regulations serve to regulate the activities of financial institutions against plunging the financial market into chaos. For instance, the national Reserve requirement dictates the base change rate that a financial institution should observe when lending in the public. However, it is evident through the recent financial crisis that financial innovation that led to deregulation open the economy to erosion. Economists have observed that banks and other financial institutions in the money market atomic number 18 in constant competition (Anderloni 56). This competition influences the practices that a financial institution would employ in conducting its business. Thus, financial institution practices must observe a given limit in innovation. For instance, studies on the cause of great feeling have indicated that financial innovation practices subjected the economy to high-risk behavior whose consequence was the great depression (Calomiris 6). Critics to financial innovation have argued that benefits of financial innovation have failed to yield the anticipated growth because of the risk factors, which the innovation creates in the financial sector (Meessen 199). Most financial innovation leads to excessive risk taking or failure of the financial institutions to predict the financial behavior in the future. For instance, speculation by financial institutions antecedent to the 2007 US economic crisis led to high risk lending by most financial institutions steer to the collapse of many institutions because of credit defaults. Innovation practices are beneficial to the growth of the economy when the feats are within some control. The Federal Reserve Act 1913 sought to cushion banks from risking foreclosure during financial constraints (Anderloni 156). The idea arse the Federal Reserve is to promote practices that promote the interest of the society. The Commission Inquiry on Financial Crisis calculate indicated that lack of transparent practice among banks led to unscrupulous lending in the subprime mortgage leading to the financial crisis (A.C.S.1). Lending laws set some base lending which protect the interest of the investors. For instance, the Volcker Rule influenced the banking practices by influencing the operation of the financial institutions within a ring fence. The rule defined the operation of the banks within national and abroad category. The category of these financial institutions enables a given banks within the ring fence to operate a special financial activities (Calomiris 3). On the contrary, failure to categorize the banks within particular operating spheres exposed the public to risks because handsome financial institutions collapsed with investment of the majority of the public. Financial innovation should be subject to regulation because some of the innovation practices or proposals fail to reflect the real effects that they would