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May 26, 2010
The good financial innovations...
The North Atlantic Financial Crisis has made most people suspicious of financial innovations. In this post I list eleven good financial innovations.
Good innovations are good only if they always meet at least one need of the customer.
A tentative list of eleven good financial innovations follows:
1. Insurance (Life, Health, vehicle, crop,...)
2. ATM (although a techonology tool, it certainly deserve mention)
3. Phone banking
4. Reverse mortgage
5. Inflation indexed bonds
6. carbon credits
7. Preference shares
8. Non voting shares
9. Bank Guarantees
10. Group lending (as practised in microfinance)
11. Shanxi solution for ownership and types of shares to be issued by banks
Pl feel free to add to the list (you may even include innovations more than a century old---like "insurance", Shanxi solution,... in the above list).
Why has the "knowledge age" not delivered good financial innovations?
Is the failure to generate more financial innovation a failure of the "marketing" function in banking and financial services? If yes, who is responsible and how do we correct the problem?
WHAT DO YOU THINK?
Posted by amgodbole at May 26, 2010 12:15 PM
If you find a quorum , why don't you conduct at least one such seminar in Chennai. IFMR can be looked for such partnership. Thanks.
Posted by: shree mohan singhee at August 26, 2010 07:16 AM
I am a novice in Finance and Economics, so pardon me if I sound like I am speaking Elbonian.
I always wonder why the governments don't actively participate in all the markets to smoothen the up's and down's in the market's in the way they do with the currency markets (the managed floating ones)? This would reduce market volatility (the part that's not backed by sound fundamentals) and therefore make markets more efficient. This is certainly not my idea and is something I have come across in more than one of Soro's books. But I would like to mention that this idea is so very common in engineering and find's so many applications that have gone a long way in improving our lives. The most simplest examples include the humble Voltage stabilizers, shock absorbers, to the sophisticated flight control systems. This idea is at the heart of the theory of control Systems (the intuition behind Lyapunov function's).
So I would like to see "Managed Floating Currency" as one of the innovations. What do you think?
Posted by: Krishna Akella at August 31, 2010 09:41 AM
In continuation of what I posted earlier... I would also like to mention that the updates (in evolution) to the Basel accord, include a framework for building capital buffers through capital conservation. Accumulating capital outside the periods of stress and using the accumulated capital during periods of stress. Along with a gradual imposition of constraints on the bank as the capital levels fall below the conservation range. This is similar to the "shock absorbing" function.
Posted by: Krishna Akella at September 1, 2010 06:47 PM
Hi Krishna,
Thanks for your comments.
Some thoughts follow:
Markets are supposed to generate price signals which in turn carry information for producers and consumers. Unlike natural phenomena, I think it is very difficult to filter out or absorb the noise since we can't easily distinguish between signal and noise in the financial markets.
In fact when traders are trading on volatility indices they are actually trading on a mix of signal & noise!
Is there a way to Mathematically distinguish between noise and signal in the financial markets? What could be a negative feeback loop for the financial markets (for increasing stability)?
Regards,
Aniruddha
Posted by: Aniruddha M Godbole at September 2, 2010 01:46 PM
Hi Aniruddha,
Thanks for sharing your thoughts!
I am not sure if mathematical separation of noise and signal is possible in financial markets. But I think it will be very very difficult to do so. And even if somebody does come up with some model, can a policy be formulated based on a mathematical model? Also, I think micro-managing the markets can be very very inefficient requiring a lot of wasteful effort.
"What could be a negative feedback loop for the financial markets (for increasing stability)?" That is an interesting thought! You mentioned in your talk the other day, that the govt. should engineer a one-time real estate crash by a massive supply side intervention. That would be a negative feedback loop for me.
If the government's can adopt a transparent policy of intervention, to correct any mis-alignments from time-to-time, I believe that itself would indirectly reduce the market volatility.
Warm regards,
Krishna
Posted by: Krishna Akella at September 4, 2010 10:37 AM
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