Innovations in the financial institutions

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INNOVATIONS IN THE FINANCIAL INSTITUTIONS
Innovations in the Financial Institutions
Name
Subject
Date
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Innovations in the Financial Institutions
Innovation in financial institutions and transactions is a process of change that assumes
different forms in the financial system. The process involves the transformation of the financial
products, financial intermediaries, and markets. The major purpose of the innovations includes
reduction of running costs, minimization of risks and improvement of products and services.
Innovative forms of financial institutions and transactions are characterized by risk-shifting
innovation, product innovation, and process innovation.
The risk-shifting innovations establish a distinct separation or combination of diverse
individual instruments to attain new instruments with different risk features
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. The innovation also
entails the reassembly of different combinations of individual instruments such as interest rate
risks and credit risk. Under the risk-shifting innovations, there exist two main categories, namely
instrument innovations and post-contract innovations. Under the instrument innovations, an
established instrument is designed to attain given features for projected benefits to an
organization
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. The post-contract innovations ensure that the risk features are changed after the
original instrument is utilized. The instruments are defined as the best way to predict the
probability of making a loss. The advancement in technology facilitates the risk-shifting
innovations that revolutionize the methods used in risk management
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. Financial institutions
implement various approaches to measuring and averting financial risks in the institutions and
the financial system.
1
Luisa, Anderloni, David T. Llewellyn, and Reinhard H. Schmidt. 2009. Financial innovation in retail and
corporate banking. (Cheltenham, UK: Edward Elgar).
2
Joanna Błach. "Financial innovations and their role in the modern financial system-identification and
systematization of the problem." e-Finanse: Financial Internet Quarterly 7, no. 3 (2011): 13
3
Adolfo Rodríguez Vargas. "Assessing the contribution of financial innovations to the production of implicit
services of financial intermediation in Costa Rica." Session 1: An overview of challenges related to measuring
financial innovations 26 (2008): 445.
3
The product innovation involves changes in new financial instruments, techniques,
contracts, and markets
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. The improvements made either reveal different instruments that possess
diverse characteristics separately or as a combination. The product innovations also include the
introduction of new products and services meant to meet the dynamic market needs.
Transformations of the products and services facilitate intermediaries to remain competitive by
providing a customer-focused form of change
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. The innovations also help in offering solutions to
present and future needs of the customers. Product innovation also involves the implementation
of techniques meant to increase the market share, promote market extension and diversification
of products and services offered. Examples of product innovation include adjustable-rate
mortgages, debit cards, variable rate bonds ATMs, and online banking
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.
The process innovation entails the introduction of new production processes that facilitate
the provision of innovative or existing products and services. The changes made in the initial
processes are connected with various improvements in the procedures in the financial system.
Examples of improved processes include the introduction of new means of processing
transactions, pricing, distribution of securities and handling electronic transactions
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. Financial
institutions further conduct process innovations to boost the effectiveness of the production
process. The steps taken in improving the processes are directly connected to the present
technological changes in the financial system. The innovations also aid in synchronizing related
procedures to improve the customers’ experience. The financial institutions further seek to
improve other processes such as asset valuation, transaction payments, and associated practices.
4
Luisa, Anderloni, David T. Llewellyn, and Reinhard H. Schmidt. 2009. Financial innovation in retail and
corporate banking. (Cheltenham, UK: Edward Elgar).
5
Joanna Błach. "Financial innovations and their role in the modern financial system-identification and
systematization of the problem." e-Finanse: Financial Internet Quarterly 7, no. 3 (2011): 13
6
Cristian Ionescu. "Financial Instability and Financial Innovations." Economy Transdisciplinarity Cognition 15, no.
2 (2012): 30.
7
Luisa, Anderloni, David T. Llewellyn, and Reinhard H. Schmidt. 2009. Financial innovation in retail and
corporate banking. (Cheltenham, UK: Edward Elgar).
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The financial system and institutions exhibit high levels of risk-shifting innovation,
product innovation, and process innovation. The innovations are characterized according to the
categories above that show their diversity. In spite of the differences in the transformations, the
innovations made are crucial to the survival of the financial institutions. The risk-shifting
innovation helps the organization in averting risks using separate or a combination of
instruments in the financial system. The product innovation enables institutions to introduce new
products or develop the existing products to boost customer experience and remain competitive
in the market. The process innovation improves the efficiency of procedures carried out in the
organizations. The financial innovations accrue numerous benefits to the firms that implement
the different forms available.
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Bibliography
Anderloni, Luisa, David T. Llewellyn, and Reinhard H. Schmidt. 2009. Financial innovation in
retail and corporate banking. Cheltenham, UK: Edward Elgar.
Błach, Joanna. "Financial innovations and their role in the modern financial system-identification
and systematization of the problem." e-Finanse: Financial Internet Quarterly 7, no. 3
(2011): 13-26.
Ionescu, Cristian. "Financial Instability and Financial Innovations." Economy Transdisciplinarity
Cognition 15, no. 2 (2012): 30.
Vargas, Adolfo Rodríguez. "Assessing the contribution of financial innovations to the production
of implicit services of financial intermediation in Costa Rica." Session 1: An overview of
challenges related to measuring financial innovations 26 (2008): 445.
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