Innovative Financial Instruments
The modern financial system has been characterised by the high pace of innovation. They have in fact played a significant role in the development of the global financial crisis and have thus attracted significant attention in recent years (Appel, 2015). It however needs to be pointed out that information on innovative financial instruments is currently rather unstructured and it is necessary to systematise existing knowledge on the subject (European Commision, 2011). The proposed paper will thus explore various aspects of financial innovation and their role in the contemporary financial system. It will focus on sources of innovation, motives for development of innovation and their role and impact. It is expected that the execution of the dissertation will result in a systematic exploration of the subject and in encourage further research on the subject.
Appel, S., (2015), Experience with financial instruments in the period of 2007-2013 an the new framework for the period of 2014-2020, Brussels: European Commission.
European Commision, (2011b), Innovative Financial Instruments: the Commission adopts a Communication presenting its view on the future of such instruments in EU budget spending, Brussels; European Commission.
Role of Innovative Financial Instruments in Development of Financial Crisis
There is wide agreement that the use of innovative securities played a core role in the development of the financial crisis and turmoil of 2007-2008 (Dabrowski, 2017). Bundling and securitisation of subprime residential mortgages and their further engineering into complicated structured securities aided the transfer of losses to investors and markets across the world (Dabrowski, 2017). Several other innovations, market structure and security design also resulted in the exacerbation of the financial turmoil (Bernholz & Vaubel, 2014). It is thus interesting to study the impact of financial innovation and whether linkages do exist between innovation and the possibility of financial crisis. The proposed dissertation will probe at in-depth into the role of innovative financial instruments in the global financial crisis and attempt to determine the relationship between innovative financial instruments and the emergence of further financial difficulties across the world.
Bernholz, P., & Vaubel, R., (2014), Explaining Monetary and Financial Innovation: A Historical Analysis, NY: Springer International Publishing.
Dabrowski, M., (2017), “Potential impact of financial innovation on financial services and monetary policy”, Available at: http://www.case-research.eu/uploads/zalacznik/2017-07-18/Potential_impact_of_financial_innovation_on_financial_services_and_monetary_policy.pdf (accessed August 29, 2018).
The Role of Securitisation in the Transformation of Risky Assets into Safe Securities
Substantial debate and discussion has occurred on the role of securitisation in the development of the global financial crisis (Engelen & Glasmacher, 2018). Lending under the securitisation model constitutes a complex process, wherein loans are aggregated and developed into diverse securities with dissimilar risk and return characteristics that appeal to different investor groups (Wijburg & Aalbers, 2017). These securities thereafter become inputs for the conduct of further securitisation activities (Wijburg & Aalbers, 2017). The objective of a securitisation process is concerned with the creation of instruments that can be placed for sale in the market (Engelen & Glasmacher, 2018). It is thus important to investigate and analyse the ways in which securitisation can be used to transfer and convert risky assets into safe securities in order to comprehend the basic risk associated with the process and the ways in which they can be managed.
Engelen, E., & Glasmacher, A., (2018), “The waiting game: How securitization became the solution for the growth problem of the Eurozone”, Competition & Change, Vol. 22, Iss (2): pp. 165–183.
Wijburg, G., & Aalbers, M., (2017), “The alternative financialization of the German housing market”, Housing Studies, Vol. 32, Iss (7): pp. 301–320.
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