On the other hand, because of possible systemic concerns, some policymakers may want to regulate innovative instruments and institutions even as they are developing. In my view, policymakers can best balance these goals by expending the effort needed to understand financial innovations as they emerge and by avoiding overregulation that may stifle valuable innovations.
When I talk about financial innovations, I have in mind several types of developments. A far-reaching set of innovations is the development and increasing popularity of products for the transfer of credit risk. Prominent among such innovations are credit derivatives, asset-backed securities, and secondary-market trading of syndicated loans.