However, the challenges posed by financial innovation for market participants, supervisors, rating agencies and, last but not least, for investors have been huge: First, the boost in innovation in financial services was associated with new products and processes of increasing complexity. The derivatives have now become their own worst enemy.
Their complexity combined with rapid growth of new types has been such that not only were borrowers unaware of the underlying risks but also, remarkably, the creators of these products. There is also the complexity or increasing in-transparency of the increasingly longer chains of intermediation and re-intermediation through “securitisation”. This made a further proper assessment of the risks even more difficult.