Essays on Analysis of Financial Innovation: The Bright and Dark Sides by Beck, Chen, Song Article

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The paper "Analysis of Financial Innovation: The Bright and Dark Sides by Beck, Chen, Song" is an outstanding example of a finance and accounting article.   The focus of the paper is to examine the hypotheses related to the bright and dark side of financial innovations. In doing so, it establishes and adopts a sample of 32 countries and evaluates their data for the period between 1996 and 2010. It is noted that the conventional perception of financial innovation ascertains of its brightest side so that it improves on the overall quality and variety of banking services; ensures that there is the concept of risk-sharing; completes the existing market as well as ensures to improve on the overall allocative firm efficiencies (Beck et al, 2013).

On the darker side, financial innovations are perceived to be the major contributory factor to that recently witnessed financial global crisis. During the crisis, financial innovation resulted in the unexpected credit expansion strategies that catapulted the progress of the boom and consequent bust in housing prices. The authors note that currently, there is little or no information related to finding the real and financial implications of financial innovations, which is mainly due to lack of substantive data within this area (Beck et al, 2013).

Despite there being data evaluation on financial innovation on matters related to newer forms of financial securities; launching of credit scoring techniques and newer organisational forms like internet-only based banking, their conceptual studies have indeed resulted to a great level of mixed outcomes. DeYoung et al (2007) findings support the hypothesis that there is a stronger level of evidence which links financial innovation to an improved overall bank growth while also supports financial deepening.

In regards to this research hypothesis, support is ascertained whenever it is established that US community banks that have gone ahead to adopt internet-banking have continued to witness a substantial level of profitability growth as a result of deposit-related charges. Notably, Berger et al (2005) argue that small and medium-sized business credit scoring will always improve their respective amounts of bank lending at any given moment in time. Other research studies further indicate that the banking institutions, which utilises their credit derivatives as risk management strategy would most certainly transfer any level of benefit that accrues from the process to its immediate customers in form of lower interest spreads as well as cut lending in the event of a global financial crisis.

In determining the how much financial innovation instruments as securitisation changes as well as ex-ante incentives of financial intermediaries are able to provide pertinent care to the borrowers, it is noted that there is a reduction in possible asymmetric information (Beck et al, 2013). It is important to understand that this asymmetric information has the capacity of improving the level of risk-taking as a result of the probable existence of agency issues that can exist between bank owners and management or even lower expenses related to the fragility of banks. Following this line of argument, the article adheres to the concept put forth by Tufano(2003) of financial innovation that is directly linked to invention and diffusion of newer products, services or even ideas while at the same time direct its attention to aspects related to R& D spending in the overall financial industry.

To be specific, the paper conducts the analysis using the OECD innovation survey data on banks’ R& D expenditures for 32 countries for the period extending between 1996 and 2010 in order to establish possible wider indicators of financial innovation; financial system securitisation capacity as well as the overall importance of off-to on-balance-sheet assets like the patterns of innovation within particular sections of the sector as a whole. The paper seeks to relate the concept of financial innovation to variables related to bank growth and fragility within the aforementioned period as overall bank performance in the course of the recently witnessed financial crisis.

By use of more than 2000 banking institutions’ data situated within the 32 countries, the paper establishes that higher degree of financial innovation is attributed to the aspect of high banking growth and fragility (Beck et al, 2016). In fact, to show evidence for this hypothesis, it is ascertained that the bank’ s profitability significantly dropped at a higher rate in the course of the recently witnessed financial crisis while the financial concept related to buy-and-hold stock options returns were also lowly positioned within the countries that portrayed a high pre-crisis level of financial innovation.

It is also hypothesised and proven that a higher level of financial innovation adoption by the underlying financial sector within any given country results to a stronger relationship between the country’ s immediate wide variety of growth opportunities as well as gross domestic product per capita growth as well as a higher development of industries that enjoy greater growth opportunities (Beck et al, 2016).

References

Beck, T, Chen, T, Lin, C & Song, F, M. (2016).Financial Innovation: The Bright and the Dark Sides. Journal of Banking and Finance, 72, 28-51

Beck, T et al. (2013). Bank competition and stability: Cross-country heterogeneity. Journal of Financial Intermediation, 22, 218-244

Berger, et al. (2005). Credit scoring and the availability, price, and risk of small business credit. Journal of Money, Credit, and Banking, 37(2), 191-222

DeYoung, R, et al. (2007). How the Internet affects output and performance at community banks? Journal of Banking & Finance, 31(4), 1033-1060

DeYoung, R. (2001). The financial Performance of pure play internet banks. Economic Perspectives Federal Reserve Bank of Chicago, 25(1) 60-75

Helman, E. (1993). Innovation, imitation and intellectual property rights. Econometrica, 61, 1247-1280

King, R, & Levine, R. (1993). Finance, entrepreneurship, and growth: Theory and Evidence, Journal of Monetary Economics, 32, 513-542

Norden, L et al (2014). Financial innovation and bank behaviour: Evidence from Credit markets, Journal of Economic Dynamics and Control, 43, 130-145

Tufano, P. (2003). Financial Innovation: the last 200 years and the next, In: Constantinides, George M, Harris, Milton, Stulz, Rene, M (Eds). The Handbook of the Economics of Finance, JAI Press Inc.

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