Innovation is often regarded as one of the most powerful forces shaping human society by bringing significant improvements in material standards of living. It may seem obvious that if innovation promotes economic growth, financial innovation must also promote economic growth but this does not necessarily follow. There has been a great deal of financial innovation in the past twenty years but its social value remains unclear.

Major economic benefits can flow from a healthy and innovative financial sector. Greater sophistication and depth of financial markets can promote economic growth by allocating capital where it can be most productive. A broader dispersion of risk across the financial system can increase the resilience of the system and the economy to shocks. Financial innovation, however, can also lead to excessive risk taking. Today, financial innovation stands accused of being complicit in the recent financial crisis of 2007-2008 that has created the first global recession in decades. Recent innovations that were once celebrated, such as negative-amortization mortgages, debt obligations (CDOs) and synthetic CDOs, credit default swaps, etc., are often accused of having either amplified or caused the crisis.

How does financial innovation affect concentration and risk in financial systems?

Does financial innovation promote excessive financial intermediation by inducing investors to underestimate the risk of the investments they make?

How to accurately incorporate this underestimated risk into pricing and asset allocation strategies? Are the incentives of the financial sector biased in favour of too much innovation?

How can financial regulation account for the increase in transaction costs, the ongoing costs of effective oversight, and the risk of unanticipated consequences resulting from financial innovation?  

Can higher capital requirements reduce the incentive for some of the most controversial kinds of financial innovation without increasing social costs and slowing economic growth?

The conference and the JBF special issue welcomes papers on financial innovation that contribute to reassessing the benefits as well as the potential and realized costs and risks of recent financial innovation and make recommendations to ensure that financial innovation does not impede on the stability of financial systems and the sustainability of economic growth.