And, assuming that Hong Kong is by no means the only place where new ideas are being developed across the financing spectrum, I am led to the conclusion that there is little prospect of any immediate let-up in the pace of global product innovation in finance. That is a conclusion reached from merely observing what is at present happening in the financial world, but it does raise questions as to where in all of this lies the scope for extra value added and profit. If one assumes that the overall levels of savings and of investment demand in the economy are little affected by micro developments in the financial sector, then it follows that innovations, in order to be profitable, must be continually exploiting new arbitrage opportunities, new and more efficient ways of serving customers, and so on. One can understand how, over the years, the increased level of competition in finance, both within and between countries, as well as the communications revolution and the IT revolution, have provided the basis for extraordinary gains in efficiency. But will this trend continue? Indeed, can it? Might the financial sector now be encountering sharply diminishing returns from innovation, in which case much of the new effort put into designing new products would prove to be an expensive mistake? Or would it perhaps be more accurate to describe it as an expensive necessity, since, if you don’t do it, someone else will?
But, of course, it would also entail lower risk for bank equity and bond investors, and surely it is risk-adjusted returns that matter. And it would also deliver lower risk to society more generally, which matters hugely. To be clear, we want banks and the financial sector more generally to thrive. The institution I come from believes in a market economy, in capitalism. The financial sector has played an enormous role in the development of modern economies. But a regime in which banks can thrive standing on your own feet would be a better market – for all of us. BIS Review 83/2009  9