Question

How can financial innovation lead to financial crises? Apply this topic to your life.

Answer 1

Explanation -

Financial Restriction lead to introduction of new financial products and removal of many restriction on investment opportunities and Offering investment services.

Such Innovation has resulted into risk increment. Since many new managers has not enough financial expertise to understand these new innovation hence lending becomes risky.

Such risk becomes double since regulations and reforms also fail to supervise these new innovation done at rapid stage.

Hence risky lending becomes a risk for both investors and Investee leading to decrease in economy of the country due to blockage of money leading to financial crisis.

Such things also happen to us in our daily life where financial institution introduces new product and attract investors. Hence we should carefully examine the product documents before investment. Also our examination shall also include that such product meets the required regulation requirement.