Financial innovation: The bright and the dark sides

Thorsten Beck; Tao Chen; Chen Lin; Frank M. Song

doi:10.1016/j.jbankfin.2016.06.012

Financial Innovation: The Bright and the Dark Sides

Thorsten Beck, Tao Chen, Chen Lin and Frank M. Song

2016 · Published in Journal of Banking & Finance 72: 28–51 · DOI 10.1016/j.jbankfin.2016.06.012

PDF of Financial Innovation: The Bright and the Dark Sides (Accepted manuscript, DR-NTU repository)

In one sentence

Financial innovation is associated with faster bank growth but also with greater bank fragility, and on net with higher economic growth where growth opportunities are better.

Summary

Using data from 32 countries over 1996–2010, the paper assesses how financial innovation relates to bank growth and fragility and to economic growth. Several measures of financial innovation, both broad and specific, are associated with faster bank growth but also with higher bank fragility and worse bank performance during the recent crisis. These effects are stronger in countries with larger securities markets and more restrictive regulation. Despite these mixed findings, the net effect on economic growth appears positive: financial innovation is associated with higher growth in countries and industries with better growth opportunities.

Abstract as published

Based on data from 32 countries over the period 1996-2010, this paper is the first to assess the relationship between financial innovation, on the one hand, and bank growth and fragility, as well as economic growth, on the other hand. We find that different measures of financial innovation, capturing both a broad concept and specific innovations, are associated with faster bank growth, but also higher bank fragility and worse bank performance during the recent crisis. These effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks. In spite of these seemingly ambiguous findings, our evidence points to a positive net effect of financial innovation on economic growth: financial innovation is associated with higher growth in countries and industries with better growth opportunities.

Citation

Thorsten Beck, Tao Chen, Chen Lin, Frank M. Song (2016). Financial innovation: The bright and the dark sides. Journal of Banking & Finance, 72, 28–51. https://doi.org/10.1016/j.jbankfin.2016.06.012

BibTeX

@article{beck2016financial,
  title = {{Financial innovation: The bright and the dark sides}},
  author = {Thorsten Beck and Tao Chen and Chen Lin and Frank M. Song},
  journal = {Journal of Banking \& Finance},
  year = {2016},
  volume = {72},
  pages = {28--51},
  doi = {10.1016/j.jbankfin.2016.06.012}
}