Financial Institutions and Market - Financial Innovation Essay

Financial Institutions and Market - Financial Innovation - Essay Example Advantages include; the creation of new securities, creation of new markets and financial institutions and the economic growth. The creation of new securities provides the investors with new avenues to invest in and it injects fresh capital which in turn leads towards increased employment opportunities. The disadvantages include; use of financial innovation for deceptive purposes such as off balance sheet financing and the creation of special purpose vehicles. The paper discusses two cases related to off balance sheet that shed light over the detrimental impacts of financial innovation over the economy as a whole. Financial Institutions & Market – Financial Innovation There has been significant debate regarding the validity of financial innovation. It has been suggested that financial innovation plays a vital role in the economic growth and prosperity and that, resultantly, financial system regulators should resist over-regulation that might create hindrances in the way of inn ovation. As a counter argument, it has been brought to foreground that certain financial innovations have been blamed for creating enormous economic crises in the recent past. As a result of such financial crises, governments all over the globe are taking extraordinary measures in order to avert more of such crises and they are imposing new financial regulations in this regard. The question that would be discussed in the following paper is whether the potential benefits of the financial system innovation should deter regulators from imposing restrictions on the activities of financial institutions. ADVANTAGES OF FINANCIAL INNOVATION Even though financial innovation has been blamed as the main reason behind financial crises, it has also been said that financial innovation is very important for economic growth. The economic crises that have been said to be due to financial innovation are actually due to the improper use of financial innovation. Innovation, if used properly and constru ctively, can lead towards growth and prosperity in the economy of a country. Following are some of the benefits of financial innovation: Creation of New Securities Financial innovation is the leading reason behind the creation of new securities. Any creation of securities leads towards new capital which is used for economic growth. By creating of new securities, investors invest in the securities and earn returns while the institutions that create such securities invest the capital for the purpose of economic growth (Kimmel, 2010). The resultant growth creates new job opportunities and adds new revenue to the overall economic system of the country. In this way, financial innovation leads towards new investment and financial growth. Creation of New Markets and Institutions Financial innovation is the reason behind the creation of new markets and financial institutions. For example; the concept of ‘Collective Investment Schemes (CIS)’ came to foreground due to financial i nnovation and this method is being widely used by investors all around the world to create and invest in investment schemes with different investment portfolios (Boot & Thakor, 1997). The investment schemes