Rethinking Financial Innovation: Reducing Negative Outcomes while Retaining the Benefits

This report examines innovation in financial services in order to understand how or why it may sometimes contribute to negative outcomes. It acknowledges that some financial innovations were centrally involved in the events leading up to the financial crisis and ensuing recession. It provides recommendations to reduce future likelihood of such negative outcomes from innovation. Key findings of the report state that innovation is a positive force within financial services. But innovation introduces Knightian uncertainty to financial services, which occasionally manifests itself in negative outcomes. The financial services sector's relationship to the rest of the economy makes it vital to reduce the likelihood of negative outcomes. This can be done by adapting existing risk management mechanisms to be more sensitive to the specific contribution of innovation to uncertainty and risk. To improve the industrys anticipation and management of these negative outcomes, the report makes recommendations in the areas of:

• Enterprise risk management;
• New product development and approval processes;
• Consumer orientation;
• Building a pro-competitive marketplace;
• Strengthening systemic risk oversight;
• Monitoring and overseeing the industry.