NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Innovation and the Management and Regulation of Financial Institutions

Robert C. Merton

NBER Working Paper No. 5096*
Issued in April 1995
NBER Program(s):   AP    CF    IFM    ME

New security designs, improvements in computer telecommunications technology and advances in the theory of finance have led to revolutionary changes in the structure of financial markets and institutions. This paper provides a functional perspective on the dynamics of institutional change and uses a series of examples to illustrate the breadth and depth of institutional change that is likely to occur. These examples emphasize the role of hedging versus equity capital in managing risk, the need for risk accounting and changes in methods for implementing both regulatory and stabilization public policy.

*Published: Journal of Banking and Finance, Vol. 19, nos. 3/4 (1995): 461-481. Published as "Financial Innovation and Economic Performance", JACF, Vol. 4,no. 4 (1992): 12-22.

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