Quantitative Finance and Innovation
One of the major functions of capital markets is the allocation and transfer of economic risks. The past few decades were marked by substantial changes in the patterns of finance and investment: Private equity-investment vehicles mobilized an enormous amount of money that was available for start-up firms and other innovative companies. Innovative refinancing structures for bank credit and mortgages were less successful (structured credit products). These types of product were responsible for triggering the Financial Crisis of 2007/08, which demonstrates that financial innovations can have unforeseen social consequences. Economic research about the social consequences of financial innovations is therefore extremely important, but it is often neglected.
Further examples of financial innovations that need active monitoring and economic analysis stem from the impact of the current disintermediation process on the credit-issuing services of banks, owing to their tighter capital requirements and increased financing costs, or stem from the new methods used to increase the insurance sector’s risk-capacity (so-called reinsurance structures).
The CIF will address the social risks and opportunities presented by innovative financial products. This research is vitally important for Switzerland, as it is a very large financial center with the respective opportunities and risks.
Financial Innovation and Risk Transfer
For centuries capital markets have played a key role in the allocation of risk. They improve the possibilities for individuals and institutions to diversify or transfer a portion of their risks more efficiently. Over the years, many innovations – in terms of contracts, processes or institutions – have contributed to improve this process by widening the range of risks covered by financial con- tracts or by strengthening the risk-bearing capacity of the economy, but not always successfully. Based on this analysis, the regulatory agenda of OTC markets as well as the emerging direct lending facilities of institutional investors are discussed.