Abstract and Keywords
This chapter examines the regulatory framework for financial innovation. It begins with an overview of the fundamental concepts related to financial innovation, defining what is understood as financial innovation and considering the use of the shadow-banking system by financial institutions in order to engage in regulatory tax and regulatory arbitrage. It then looks at the costs, benefits, and risks of financial innovation, given the recent global financial crisis, with particular emphasis on the most important risks originating in the shadow-banking sector. It also discusses contemporary regulatory reforms dealing with financial innovation, including the centralization of derivatives trading and clearing and margin requirements for over-the-counter trading. Finally, the chapter analyses the contemporary approaches that have been adopted worldwide for the regulation of financial innovation, along with their flaws.
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