There is a natural incentive behind financial innovation, since there is a lot of money at stake for those who innovate successfully. There is a lot at stake for the macroeconomy, too, because a return to sustainable economic growth around the world will require continued financial innovation. Regulation must allow these natural forces to manifest themselves, albeit in a safe way.
Where the creative forces might take us Given this context, let’s speculate about the future of financial intermediation: How will the forces of competition manifest themselves in the years ahead? Let’s start with banks. Some may choose to shed business lines that have relatively low riskadjusted returns. In particular, capital market activities could shrink as the risk weights associated with them increase.