Financial Innovation and Regulation Flashcards
What is financial innovation? What does it bring?
Development of new financial products and services.
Brings efficiency to the financial system.
What are some examples of financial innovation?
- E-finance: Delivering financial services electronically.
- Fintech: Technologies used and applied in the financial system.
What are the potential benefits of financial innovation?
- Increased efficiency in financial markets
- Greater access to financial services
- Lower costs for consumers and businesses
What are the potential risks associated with financial innovation?
- New financial products lead to investor confusion and potential losses.
- Systemic risk if not properly managed or regulated. Like what
- Regulatory challenges por fast pace of change.
What is an example of the risks of financial innovation?
The rise and fall of China’s P2P lending market is an example of the risks associated with financial innovation. A lack of regulation and mounting defaults led to the collapse of this market.
What is Fintech?
FINancial TECHnologies.
Technologies used in the financial system:
- Mobile payments
- Money transfers
- Loans
- Fundraising
- Asset management
Describe the evolution of Fintech.
1990s: Emergence of online banking and digital payments like PayPal.
2000s: Mobile banking and payment apps like Venmo and Square became popular.
2010s: Peer-to-peer lending, robo-advisors, and digital-only banks started to grow.
2020s: Expansion into AI, blockchain technology, and decentralized finance (DeFi)
What are some emerging trends in Fintech?
CBDCs (Central Bank Digital Currencies): These are digital versions of national currencies issued and regulated by central banks.
DeFi (Decentralized Finance): Financial services that operate without traditional intermediaries like banks.
Open Banking: This allows for seamless integration of financial services across various platforms through APIs.
What is the potential for future growth in Fintech?
Fintech has the potential to continue to grow, expanding into new markets and incorporating innovations in areas like AI and blockchain.
What are the characteristics of a Ponzi scheme?
Ponzi schemes are fraudulent investment operations where
Returns are paid to existing investors from funds contributed by new investors.
They are unsustainable because they rely on a constant influx of new money to keep the scheme going.
They often collapse when this flow of new investment dries up.
What is an example of a Ponzi scheme?
The Ezubao scandal is an example of a large-scale Ponzi scheme. It operated as one of the largest peer-to-peer (P2P) lending platforms in China, attracting many investors with promises of high returns. However, the investment projects on the platform were largely fabricated, and the company was ultimately using new investors’ money to pay off earlier investors
What are the main reasons for regulating financial markets?
Increasing information available to investors: Regulations can require companies to disclose more information to investors
–> reducing problems like adverse selection (where less informed investors are more likely to be taken advantage of) and moral hazard (where the actions of one party may be hidden from the other).
Promotes informed decisions from investors and overall efficiency of financial markets.
Ensure the soundness of financial intermediaries: Regulations aim to make sure that financial institutions are stable and operate prudently.
–> Measures like restrictions on the types of assets they can hold and capital requirements that ensure they have enough resources to cover potential losses.
Prevent bank runs and financial crises.
Mitigate systemic risk (cascading effect form failure of one financial institution) throughout the entire financial system. Regulations aim to reduce interconnectedness in the financial system to prevent.
Name some principal regulatory agencies in Canada and their roles.
Office of the Superintendent of Financial Institutions (OSFI): OSFI regulates and supervises federally regulated financial institutions, including banks, insurance companies, and pension plans. They set capital adequacy requirements, conduct audits, and ensure the financial health of these institutions.
Bank of Canada: The Bank of Canada is Canada’s central bank, responsible for monetary policy, financial stability, and the management of the Canadian dollar.
Canada Deposit Insurance Corporation (CDIC): The CDIC provides deposit insurance to depositors in member institutions, protecting them from losses if their bank fails.
Provincial securities and exchange commissions: These commissions regulate securities markets within their respective provinces, ensuring fair and transparent trading practices. They also oversee investment advisors and dealers.
