Financial products like credit derivatives have increased the possibilities to spread and manage risks. And indeed, the financial system proved to be better capable of absorbing shocks, as was demonstrated when the dot.com bubble burst or after 9/11. However, clearly, financial innovation has not prevented the financial crisis from happening. In fact, financial innovation is often pointed out as one of the root causes.
Risks associated with financial innovation The risks associated with financial innovation are real. First of all, not only size, but also complexity in the markets for sophisticated financial products increased rapidly. This came at the cost of transparency.