Edited by Iwan J. Aziz and Hyun S. Shin
Chapter 7: Financial innovation and development in East Asia: balancing risks and opportunities
In the two decades prior to 2007, financial innovation was viewed in most countries as a desirable objective worthy of policy support. Institutional development was particularly encouraged, specifically, law reform, deregulation, and financial liberalization. During this period, finance in Asia was generally viewed as suffering from a lack of innovation, with repressed markets and an underdeveloped institutional infrastructure, particularly in the realm of law and regulation. Since 2007 and the onset of the global and Eurozone financial crises, the general view of financial innovation has become much more nuanced. Financial innovation is no longer seen as universally desirable, particularly as many innovations of the preceding decades played a central role in the global financial crisis. Financial systems that had previously been characterized as suffering from excessive regulation and insufficient innovation, such as those of Canada and Australia, performed far better during the crisis than the highly innovative financial systems in the UK and the US. Likewise, while the financial systems of East Asia had been viewed as insufficiently innovative, they suffered relatively minor financial crises by comparison to the US and Western Europe. As a result, views of financial innovation have changed significantly in a short period of time.
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