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An unhelpful anthology

Book Review: Essay collection fails in its core objectives

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  • Written by  Nahum Goldmann
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  • Comments:   DISQUS_COMMENTS
Financial Innovation in Retail and Corporate Banking (New Horizons in Money and Finance). Edited by Luisa Anderloni, David T. Llewellyn, Reinhard H. Schmidt. Edward Elgar Publishing, 339 pp. Financial Innovation in Retail and Corporate Banking (New Horizons in Money and Finance). Edited by Luisa Anderloni, David T. Llewellyn, Reinhard H. Schmidt. Edward Elgar Publishing, 339 pp.
Banking executives and practitioners who might like to acquire this relatively expensive ($155) collection of essays on seemingly unrelated financial services subjects could be quite disappointed. The title of this book is somewhat of a misnomer, as 10 out of 11 chapters, mainly written by Italian and other European and U.S. based academics, only marginally relate to the retail and corporate banking industry. Most of the financial innovation described in these 10 chapters is fairly trivial.

The only exception  that I found of interest regarding innovations is a chapter by David T. Llewellyn entitled “Financial Innovation And The Economics Of Banking And The Financial System,” which indeed deals with banking innovation. Regretfully, in this chapter, the banking innovation has been reduced to complex and risky credit derivative instruments and contracts. Most of the chapter material was obviously written before the 2008 liquidity shortfall in the global banking system.

Much of it directly contradicts the conclusions of the subsequent 635 page Levin-Coburn Report on the Financial Crisis of the U.S. Senate Permanent Subcommittee on Investigations that cataloged “conflicts of interest, heedless risk-taking and failures of federal oversight that helped push the country into the deepest recession since the Great Depression.”

The two year bipartisan inquiry spearheaded by Senators Carl Levin (D.-Mich.) and Tom Coburn (R.-Okla.)  concluded that the crisis was the result of high risk, complex financial products that foisted billions of dollars of losses on investors. In contrast, credit derivatives have been promoted in the chapter as enhancing “the efficiency of the financial system in the performance of its core functions.”

To shore up his position, author Llewellyn provides some truly remarkable supporting quotes of some heavyweight financial authorities, including Alan Greenspan. Today those authorities would probably rather forget they ever uttered the words quoted.

In fairness, there are some obligatory declarations in the chapter about the inherent risks associated with the credit default swap market, but these sound rather hollow, and are in any case effectively neutralized by numerous statements like:

• “…the extent of [credit-risk shifting] risk should not be exaggerated.”

• “…the most actively traded names in the credit derivatives market in practice have investment grade status and therefore are comparatively low risk entities.”

• “In any case, the amount of true credit risk transfer is small in relation to banks’ total credit exposure.”

If only! One can almost visualize a flock of black swans flying across academic horizons.

Overall, this book highlights the necessity of credible research on genuine banking innovation. In the emerging global economic paradigm, new approaches are required to support the payment and investment needs of consumers and industry.
 
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