Financial Regulation and Technology: An Opportunity for Innovation

Sharad Chandra Sharma, Ajay Mane


Innovation is recognized as an important source of economic growth and of improvement in social welfare. Policy makers globally, consider innovation a vital lever for creation of employment and raising productivity. History shows that innovations differ hugely in terms of the nature and size of their effect, which may be profound or relatively trivial. Innovations also differ in terms of how revolutionary they are in relation to existing technologies or existing approaches to the relevant market. Like any other industry, there have been plethora of innovations in financial industry over the years and there are distinctive characteristics of financial industry, many of which shape the nature and effects of financial innovation. The very reasons financial firms can be so beneficial to society – their links to the global economy, leverage and interconnectedness – magnify the social and economic effects of failures in risk management of innovation. It is not only certain institutions that will feel the effect of its failure but the wider economy through spillover effects. As people decisions and actions are driven by emotions, biases, judgments, and they are handicapped by both lack of complete information and inability or disinclination to process even available information into their decisions, the regulator, as a welfare maximiser, has to step in to nudge people towards making responsible choices. In addressing the challenges and the risks that financial innovation may create, it should also be kept in view the enormous economic and social benefits that flow from a healthy and innovative financial sector and so while proposing or implementing any regulation, it is important to ensure that it must seek to preserve the benefits of financial innovation even as it addresses the risks that may accompany that innovation. Financial regulations and financial innovations are tightly coupled together. They are the cause and effect of each other. As financial services are highly regulated along many dimensions, these restrictions create numerous opportunities for innovations that reduce or lower regulation cost. In harnessing the potential of opportunities created by the co-existence of regulation and innovation, technology has played a vital role throughout the history of financial markets. Technological advances relating to telecommunications and data processing in last couple of decades have spurred financial innovations that have altered bank products and services and production processes. Innovation has always been the key to growth and the future prospects for innovation in financial markets are very promising. Given the variety and volume of new regulations and technological advancements, banks and other financial service providers are being given considerable incentives to innovate and they should continue to do so.


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ISSN : 2251-1563