The financial crisis brought with it many challenges, both to prevailing disciplinary tenets, and for research and policy more generally. This column outlines the lessons that can be drawn from the financial crisis – issues like financial market failures, macro-prudential policy, structural changes of the financial system, and the European banking union. It argues for the inclusion of these topics in curricula for the next generation of finance students.
Dirk Schoenmaker, 06 July 2015
Bruno Biais, Jean-Charles Rochet, Paul Woolley, 21 August 2014
The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.
Thorsten Beck, Tao Chen, Chen Lin, Frank Song, 02 October 2012
Even before the crisis, many economists warned that financial innovation has a dark side. This column uses new cross-country data on financial innovation and provides evidence that financial innovation can lead to more volatility, more fragility, and more severe losses. But it also finds evidence of improved growth opportunities, better financing, and increased R&D expenditure.
Robert Shiller, 14 October 2013
Robert Shiller of Yale University has just been awarded the Nobel Memorial Prize in Economic Sciences (with Eugene Fama and Lars Peter Hansen). In this interview recorded in May 2012, he talks to Romesh Vaitilingam about his book, ‘Finance and the Good Society’, which argues that even after the crisis, rather than condemning finance, we need to reclaim it for the common good. They discuss financial innovation, personal morality, the importance of education and the contribution that finance can make to our lives.
Ross Levine, 25 October 2011
Financial systems support and spur economic growth. But does financial innovation foster financial development? While recent innovations have done damage, this column says the long-run story is that financial innovation is essential for economic growth.
Oren Levintal, Joseph Zeira, 21 September 2009
Problems of regulation appear whenever financial innovations change the ways capital markets operate. This column describes the 18th century emergence of the inconvertible banknote, a "toxic asset” ended by government regulation. The lesson is that free financial markets promote financial innovation, but government must provide adequate regulation keeping the market on track.
Vasiliki Skreta, Laura Veldkamp, 27 March 2009
Understanding the origins of the crisis requires understanding the failures of the market for ratings. This column explains how conflicts of interest and shopping for the best rating produced biased assessments of complex assets, whereas these bad incentives had not plagued ratings of simpler assets. We need to rethink how ratings are provided, lest the next bout of financial innovation trigger another round of ratings inflation and subsequent financial market turmoil.
John Kiff, Paul Mills, Carolyne Spackman, 28 October 2008
Securitisation volumes have plummeted in the wake of the subprime crisis. As a result, banks are keeping more loans on their balance sheets and tightening lending standards. This column reviews the factors that have led to this virtual market shutdown and suggests structural changes, in the form of simpler and more transparent products trading at wider spreads, will be required to revive securitisation.