Financial innovation

Financial innovation is the act of creating new financial instruments as well as new financial technologies, institutions, and markets. Recent financial innovations include hedge funds, private equity, weather derivatives, retail-structured products, exchange-traded funds, multi-family offices, and Islamic bonds (Sukuk). The shadow banking system has spawned an array of financial innovations including mortgage-backed securities products and collateralized debt obligations (CDOs).^[1]

There are three categories of innovation: institutional, product, and process. Institutional innovations relate to the creation of new types of financial firms such as specialist credit card firms, investment consulting firms and related services, and direct banks. Product innovation relates to new products such as derivatives, securitization, and foreign currency mortgages. Process innovations relate to new ways of doing financial business, including online banking and telephone banking.^[1]