5 Jul 2011
Financial Innovation and Transparency in Turbulent Times
NCCR Trade Working Paper No. 2011/65 by Panagiotis Delimatsis
The stunning failure of banks put regulatory intervention high on the agenda ofgovernments. Adequate risk monitoring, including by credit rating agencies, measurementand management have proven to be a daunting task, whereas regulation of innovativefinancial instruments has not brought about adequate disclosure and transparency. Aftercritically reviewing the virtues and pitfalls of financial innovation, this paper offers ananalysis of the main transparency initiatives undertaken in the EU and the US in the wake ofthe crisis to harness various financial innovations that have marked the history of financialmarkets in the last three decades. In addition, the paper identifies the approach as to financialinnovation that the General Agreement on Trade in Services (GATS) of the World TradeOrganization (WTO) has adopted in the early ‘90s and assesses the likely impact of the recentfinancial crisis on this stance. As the perimeter of regulation grows and countries becomemore suspicious vis-à-vis home-country financial regulation, trade in financial services willmost likely not remain unaffected.