Financial Institutions & Markets - Financial Innovation Essay

Financial Institutions & Markets - Financial Innovation - Essay Example Individuals and business concerns now have a wider range of options with respect to different types of borrowing facilities available to them. However, the recent Global Financial Crisis (GFC) is argued to be the result of this financial innovation. As a result of that most of the monetary policy makers have tightened their regulatory policies and have imposed several restrictions on the financial institutions worldwide. Borrowers have become more sensitive towards interest rates fluctuations in the financial market and the world is experiencing a situation of credit crunch now. Hence it is required to have a reassessment of the monetary policies by different nations in the world with its primary task being financial stabilization. It should also ensure development of financial innovations with more benefits and lesser costs and risks associated with it. Table of Contents Table of Contents 3 1.Introduction 4 2.Role of Innovation in Financial System 4 2.1Technological Impact 4 2.2Glob alization 5 2.3Deregulation 5 2.4Europe and its Financial Integration 5 Nature of Financial Innovation 6 Benefits of Financial Innovation 7 Demerits of Financial Innovation 8 Conclusion 8 References 10 1. Introduction Financial innovations can be defined as the improvements in the financial system through the development of new financial techniques and instruments. ... same time the impact of Global financial Crisis (GFC) on employment of strict regulatory policies to curb the development of financial innovation techniques has been studied. 2. Role of Innovation in Financial System Financial markets and financial system as a whole have experienced significant changes over the years. Innovations in the financial system have led to the formulation of various financial techniques and instruments. It has paved way to older techniques and instruments used in the financial market. With globalization there has been an increased competition amongst financial intermediaries (Cavanna, 1992, p.1). 2.1 Technological Impact Improvements in technology have a significant effect on the development of innovations in the financial system. Rapid advancement of microelectronics has resulted in the reduction of computer costs and enhancement of computer capabilities. World has become a small place and information can be shared with anyone in no time at all. It has led to financial market integration in the whole world. Share trading has been made easy through improved information systems. Information Technology and financial systems of most of the companies today are integrated and operated globally and adoption of IFRS is getting easier for them (AICPA, 2010, p.2). With advanced technologies available financial institutions are now engaged in financial instruments which are more complex in nature. 2.2 Globalization With globalization companies operate in different parts of the world. It has led to the development of international market which is growing at a rapid pace. Banks and other financial institutions have developed innovative products that could be transacted globally. Globalization has made it possible for a country to attract foreign