Financial innovation

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In finance, a financial innovation is an innovation that produces new or modified existing financial services , financial instruments , financial instruments or financial products as well as changes to existing process technologies or the introduction of new process technologies. The counterpart in products is product innovation .

General

The financial innovation is an innovation, i.e. a (re-) novelty ( Latin innovatio ). The innovation does not have to result in a completely new financial product, but can consist in the modification of an existing one. That is why Joseph Schumpeter differentiated in 1964 in his theory of economic development between “inventions” (technical inventions of a completely new product), “innovations” (implementation of an invention by a “dynamic entrepreneur”) and imitations ( imitation of an innovation by the competition).

Innovations are generally new products , new processes and new concepts or modifications to existing products, processes and concepts. Financial innovations include all money market , capital market , financial , financing and payment instruments as well as changed processes that can potentially change the structures of the monetary sector of economies in a relevant way. Most financial innovations relate to banking , its banking products and its processing techniques. Not only the market launch of completely new banking products is a financial innovation, but also minor changes to existing products are to be classified as financial innovations. A financial innovation is only complete when it has been launched on the market .

history

Financial innovations already existed in the Middle Ages , when new methods of financing such as switching emerged. Consisting of the "instrumentum ex causa Cambii" ( "causa Cambii" exchange clause) in Italy in the 12th century emerged changes made by its use as a method of payment , the cash superfluous as loan funds, he allowed the commercial credit . The money changers ( Latin cambiatori ) acted as broker between merchants ( Latin mercatori ) and payees ( Latin remittendi ) that "from place to place" ( latin de loco in locum ) on fairs attracted, with written instructions ( Latin cambium ; " Exchange ”), on the basis of which the sum of money could be paid out to a documented person at the exhibition site.

The first evidence of the Lombard loan can be found as early as 1400, when merchants granted loans to feudal lords and nobles in return for pledging . As early as 1677 there were 38 registered “Blackwell Hall” factors in London who carried out factoring . When the Swedish economist John Hartman Eberhardt defined the term del credere in 1771 , the factoring process had been in use for a long time. In the United States, the textile industry began with the first organized factoring transactions in 1890. An early form of traveler's check was the Circular Notes issued by travel company Thomas Cook in 1874 . The lease was created with enactment of the Mineral Leasing Act in February 1920, when the state public land leased for coal exploitation.

Most of today's financial innovations come from the United States. Here was the in February 1932 by the Glass-Steagall Act legally codified tier banking system ( specialist banking system) out, the segmentation of the banking market in " commercial banking ", " Investment Banking had" and the sector of deposit-takers result. The repayment credit, which began to emerge increasingly from 1950, serves as cross-border financing for goods transactions and includes the old Italian invention in the case of Wechselrembours. The forfaiting goes back to a lack of foreign currency in the Soviet Union . During Richard Nixon's visit to Moscow in May 1972, American wheat deliveries for the Soviet Union were arranged. As a result, the Soviet Union also bought wheat in Europe because of a long period of drought. Because of the shortage of foreign exchange, Russia did not pay immediately, but rather through a medium-term change in the state Soviet foreign trade bank under a guarantee from the Soviet state after discounting at Western European banks. The discounting of the bill of exchange included the purchase of the receivable, the bill guarantee led to a false forfaiting. Commercial papers (CPs) developed rapidly from around 1956, certificates of deposit (CDs) first hit the market in 1961 on a significant scale; Hoechst released the first CDs in Europe in May 1970. There has been a rating for structured finance since 1974, and the Automatic Transfer Service (ATS) has existed since November 1978, which enables US bank customers to automatically transfer from savings accounts to current accounts and vice versa.

Financial innovations on the basis of securities considerably broadened the product range for financial investments by institutional and private investors . Convertible bonds were created at the time of railroad construction in the USA. Of the 567 corporate bonds issued between 1930 and 1940, 26% were convertibles. Zero coupon bonds first hit the US market in April 1981; the stripped bonds, which are similar to zero coupon bonds, appeared in the USA from September 1982. Forward Rate Agreements (FRAs) were first traded on the Chicago Board of Trade in 1975 . European inventions were the double-currency bonds that appeared in Great Britain in 1964 , the floating rate notes (FRNs) were first issued in 1969 and the Euronote facilities that have existed since 1986.

The highest degree of innovation is in the derivatives and futures markets , which have seen rapid development since 1972. The financial engineering was looking for innovative solutions while using already known, traditional product elements. The first known cross currency swaps were concluded between IBM and the World Bank in 1981 , interest rate swaps first appeared in 1982. The logical development of both swaps was the integrated swap , a combination of currency and interest rate swaps. Financial innovations on the futures markets were the financial futures , under which different groups of futures contracts are summarized: Currency futures were first traded in May 1972 on the Chicago Mercantile Exchange , where the interest rate futures were also offered in 1975 . The Stock Index Futures were first introduced on the Kansas City Commodity Exchange in 1982.

Process innovations also brought progress and convenience for bank customers. Since 1957, in Germany, cash payment with the wage packet has increasingly been replaced by the current account , which made cashless wage and salary payments possible. The Postscheckamt Hamburg introduced the standing order in 1961 . ATMs came onto the market in May 1968, and the card-guaranteed Eurocheque was introduced in May 1969. Debit cards and credit cards would not have been successful without the infrastructure innovations of ATMs, point-of-sale (1972) and swipe readers . Mellon National Bank offered the first cash management system in 1969 , and Commerzbank followed on the German market in 1983 with COBRA. Electronic banking was first introduced by Kreissparkasse Köln in 1987 for medium-sized companies.

The concept of financial innovation ( english finance innovation ) dipped seen for the first time in the US literature in 1975 to. For the author Silber, financial institutions are committed to internal ( work instructions ), regulatory ( market regulation ) and market ( market barriers ) restrictions on financial innovations in order to maximize profit . It can be seen that German banking management first dealt with financial innovations in 1985. It was followed in 1986 by Hans-Jacob Krümmel and Hans E. Zahn. Further articles appeared at short intervals. Hans-Jacob Krümmel defined the financial innovation in 1986 as a financial product, which separates certain properties of financial instruments and re-bundles them in such a way that a previously unpracticed combination of financial intermediation performance features is created. In 1988 Hans Büschgen provided a systematic overview of the financial innovations that have come onto the market since then.

The worldwide payment system SWIFT was first used in May 1977 to transfer payment data. The proportion of young products that were only developed in the last 5 years rose from 5% to 25% in the product range of the big banks between 1970 and 1980. From the real-time gross settlement system ( TARGET , TARGET2 ) installed in January 1999 only within the banking system for booking in real time , the real-time transfer for bank customers emerged in November 2017 .

In 1996, electronic money emerged , a cross-sectional technology that posed major challenges for banking management and banking supervision .

species

A distinction is made between total and partial innovations. Of Total Innovation is spoken when a new financial product results or all power elements or components of an existing financial product are new or modified. A partial innovation is present if at least one or a few elements of an existing product are changed. Furthermore, a distinction is made between product and process (process) innovations. Product innovations affect the financial products themselves, process innovations are higher-level technologies that deal with the processing or monitoring of banking business.

Banking law

The financial markets are among the world markets, which are mostly exposed to the governmental regulation efforts. In European banking supervisory law, a “New Product Process (NPP)” is intended to ensure that financial innovations do not bring financial products with product risks onto the market. It is irrelevant whether it is a total or partial innovation. In the case of financial innovations, there is a product risk if the banking product for the bank, the relevant financial market or the bank customer contains unexpected financial risks that do not result from market risks . The banking products are only ready for the market when this process and a limited test phase have been successfully completed and the banking supervisory authority has not raised any concerns . If a bank decides on the sale of new products, it can make sense for financial innovations not to be launched on the market if, due to the leverage effect or the unmanageable nature of the market risks, there is a risk potential that threatens the existence of the company.

The large number of products in OTC trading is standardized by the International Swaps and Derivatives Association (ISDA), which defines uniform standards for the individual products. According to MaRisk (BA) AT 8.1 of October 2017, a concept must be drawn up in advance for the “start of business activities in new products or in new markets (including new sales channels). The basis of the concept must be the result of the analysis of the risk content of these new business activities and their effects on the overall risk profile. ”In trading transactions, a test phase must always be carried out before ongoing trading in new products or on new markets. According to AT 8.2, the institutes have to analyze the effects of the planned changes on the control procedures and the control intensity before making significant changes in the structure and process organization as well as in the IT systems. In this way, the MaRisk in banking covers financial innovations, their relevant markets, and process innovations.

As an intangible service, financial innovations can not be protected under patent law (according to Section 1 (1) PatentG , only industrial and commercial applicability can be protected) and can therefore be copied by competitors without legal consequences . This lack of a threshold makes it easier for financial innovations to spread quickly.

economic aspects

Discussions about the economic and business importance of financial innovations show that there are still many unsolved problems. Economically, they can influence monetary policy, international credit transactions or the debt crisis, for example through debt equity swaps or credit default swaps . In banking, excessive use of innovative products could disrupt the market .

Financial innovations are believed to be made to remove or reduce imposed exogenous financial constraints on financial markets. The assumption that financial innovations are the result of supply and demand in the financial markets is also represented in the specialist literature. In the United States, financial innovation is also used to overcome the Glass-Steagull Act . The increase in the intensity of competition has a positive effect on the range of financial innovations. This increases the opportunity costs of banks that are not innovative and whose margins and market shares are coming under pressure.

Those who introduce financial innovations first can be the technology leader , cost leader or price leader in the short term and thus achieve pioneering profits. However, since financial innovations cannot be patented, there will quickly be imitators who follow technology, so that the profit margins of such financial innovations will fall again overall.

If there is market regulation by the banking supervisory authority (restrictions or even bans on banking transactions according to Section 3 KWG ), the commercial banks can react to rising regulatory costs with evasive reactions through modified financial innovations or falling transaction costs through technical progress .

Meaning and criticism

Some innovations have triggered or exacerbated economic crises or brought customers more disadvantages. In particular, the Collateralized Bond Obligation and related innovations such as the Collateralized Debt Obligation are held responsible for the financial crisis from 2007 onwards because of their lack of transparency and the failure of the rating agencies . From 2007 onwards, errors in advice contributed to the fact that the swap variant of the spread ladder swap led to large losses for German municipalities . In contrast to the pure interest rate swap, its much more complex spread ladder swap subtype is geared towards a sufficient difference between long-term and short-term swap rates and is therefore of a purely speculative nature, which is prohibited by municipalities. The cross-border leasing is for German municipalities since October 2008, foreign currency loans have become since 2011 the problem because the appreciation of the Swiss franc leads to losses for municipalities.

Financial management

The German tax authorities meant by financial innovation since the circular from the Federal Ministry of Finance in January 1994 purposefully designed investments that aim to convert taxable income into tax-free capital gains.

A (exchange-traded) security is considered a financial innovation if at least one of the following requirements is met:

Also warranty certificates as financial innovation.

In Germany , ownership of these banking products has had a tax effect since 2005 in such a way that all current income was subject to income tax and the difference between the buying and selling price when sold was fully subject to income tax. The legal basis was Section 20 (2) Sentence 1 No. 4 a) to d) EStG in the version up to December 31, 2008. Likewise, after a deposit transfer in the event of a sale using the flat-rate assessment method, 30% of the total sales proceeds will be retained ( Section 43a EStG ).

As of January 1, 2009, financial innovations are subject to the withholding tax . Since then, investment income from financial innovations has been taxed at 25% withholding tax (plus solidarity surcharge and, if applicable, church tax ). The calculation is based on the actual profit, the so-called market return.

Individual evidence

  1. ↑ Joseph Schumpeter, Theory of Economic Development , 1964, p. 100 ff.
  2. ^ Thomas Blank: Financial Innovations and Monetary Policy . Duncker & Humblot, Berlin 1991, p. 15–16 ( limited preview in Google Book search).
  3. ↑ Christoph Graf von Bernstorff, Financial Innovations: Possible Applications, Strategies, Examples , 1996, p. 5
  4. ^ Wilhelm Hartmann, Das deutsche Wechselrecht , 1869, p. 30
  5. ^ The History of Factoring . The Bureau of National Affairs, 2011, p. 10
  6. ^ The History of Factoring . The Bureau of National Affairs, 2011, p. 3
  7. ↑ The Unleashing of Money . In: Spiegel history . No. 4 , 2009, p. 71 ( spiegel.de ).
  8. ↑ United States Office of Technology Assessment, 1989, p. 48
  9. ↑ Korn for Moscow . In: Der Spiegel . No. 44 , 1972, pp. 26 ( online ).
  10. ^ Thomas Blank: Financial Innovations and Monetary Policy . Duncker & Humblot, Berlin 1991, p. 24 .
  11. ^ Thomas Blank: Financial Innovations and Monetary Policy . Duncker & Humblot, Berlin 1991, p. 21 .
  12. ^ Thomas Blank: Financial Innovations and Monetary Policy . Duncker & Humblot, Berlin 1991, p. 25 .
  13. ^ Andreas Bohn: Evaluation of Convertible Bonds , 2013, p. 109
  14. ↑ Investment banks buy up circulating government bonds, separate (“strip”) the coupons from the securities shell, certify both separately and sell both as discounted securities: Erhard Glogowski, Manfred Münch, Neue Finanzdienstleistungen , 2013, p. 208
  15. ^ Thomas Blank: Financial Innovations and Monetary Policy . Duncker & Humblot, Berlin 1991, p. 64 .
  16. ↑ Thomas Lammer (Ed.), Handbuch E-Money, E-Payment & M-Payment , 2006, p. 26
  17. ↑ William L. Silber, Toward a Theory of Financial Innovation , in: William L. Silber (Ed.), Financial Innovation, 1975, pp. 73-85
  18. ^ William L. Silber, Toward a Theory of Financial Innovation , in: William L. Silber (Ed.), Financial Innovation, 1975, p. 73
  19. ↑ Clemens Burkart, Finanzinnovationen an den Euromarkt , in: Mitteilungen aus der Institut für das Spar-, Giro- und Kreditwesen at the University of Bonn / No. 17, 1985, p. 1 ff.
  20. ↑ Hans-Jacob Krümmel, Financial Innovations and Change in the Employment Structure in the Banking Industry from 1948 to the Present , in: Communications from the Institute for Savings, Giro and Credit Systems at the University of Bonn / No. 19, 1986, p. 4
  21. ↑ Hans E. Zahn, Finanzinnovationen: Glossary of the new hedging and financing instruments , 1986, p. 2 ff.
  22. ^ Max Bigler, Financial Innovations and Monetary Policy , in: Credit and Capital, 1988, pp. 221–242
  23. ↑ Michael Demuth, Procurement of Borrowing Through Financial Innovation , 1988
  24. ↑ Hans-Jacob Krümmel, Financial Innovations and Change in the Employment Structure in the Banking Industry from 1948 to the Present , in: Communications from the Institute for Savings, Giro and Credit Systems at the University of Bonn / No. 19, 1986, p. 4
  25. ↑ Hans Büschgen, Financial Innovations - An Overview , in: Armin Gutowski (Ed.), New Instruments in the Financial Markets, 1988, pp. 9–42
  26. ^ Thomas Blank: Financial Innovations and Monetary Policy . Duncker & Humblot, Berlin 1991, p. 25 , footnote 1 .
  27. ↑ Peter Bofinger , Monetary Policy Regulations and Financial Innovations , in: Außenwirtschaft, 1987, p. 252
  28. ↑ Wolfgang Artopoeus, Innovative Commercial Transactions and Banking Supervision , in: Sparkasse 4/96, p. 150
  29. ↑ BaFin of October 27, 2017, circular 09/2017 (BA) - Minimum requirements for risk management - MaRisk , reference BA 54-FR 2210-2017 / 0002
  30. ↑ BaFin of December 14, 2012, Circular 10/2012 (BA) - Minimum requirements for risk management - MaRisk , reference BA 54-FR 2210-2012 / 0002
  31. ↑ Hans-Jacob Krümmel, Allfinanz: Structural change in the markets for financial services , in: Kredit und Kapital , Heft 11, 1991, p. 35
  32. ^ Jürgen Cramer, Financial Engineering through Financial Innovations , 1993, p. 11
  33. ↑ Peter Bofinger, Monetary Policy in the Sign of So-called Financial Innovations , in: Die Sparkasse, 1986, pp. 139 ff.
  34. ^ William L. Silber, Toward a Theory of Financial Innovation , in: William L. Silber (Ed.), Financial Innovation, 1975, pp. 64 and 66
  35. ↑ Gabriel Hawawini, Financial Innovation and recent Developments in the French Capital Markets , in: European Institute of Business Administration No. 85/25, 1985, p. 17 f.
  36. ↑ Joachim Streit, The Relevance of Monetary Innovations in the USA for Monetary Policy , in: Credit and Capital, 1984, pp. 559 ff.
  37. ↑ Armin Schwolgin , Financial Innovations and Minimum Reserve Policy , 1986, p. 62
  38. ↑ Peter Bofinger, Monetary Policy Regulations and Financial Innovations , in: Außenwirtschaft, 1987, p. 254
  39. ↑ Hans-Werner Sinn : The casino capitalism . Econ-Verlag, 2009, p. 308
  40. ↑ which can reduce or eliminate the risk of changes in interest rates in the underlying transaction
  41. ↑ BMF circular of January 20, 1994, Az .: IV B 4 –S 1980-5/94, FR 1994, 206