The Role of Financial Innovation in the Modern Financial System: A Conceptual Review.

Abstract

This research paper examines the role of financial innovations in the modern financial system. It aims to identify and organize the fundamental issues and definitions pertinent to this topic. First, the paper outlines the significance of the financial system and financial markets within the economy, detailing their functions and highlights their distinctive characteristics, with a particular emphasis on their susceptibility to innovation. Newt, we address the core concepts associated with financial innovations, particularly concerning their definition, as well as the drivers behind their creation. Finally, the paper presents a systematic classification of the most important types of financial innovations, along with the functions they perform within the modern financial system. This shift in focus allows as to move to merely describing the phenomenon to understanding its causes, mechanisms, and impacts on how the financial system performs its functions.

     The results indicate that the financial innovations are not a homogeneous set of financial developments, and thus their effects on the financial system can be ambiguous. Therefore, a definitive evaluation of their role cannot be generalized; instead, it must be performed on a case-by-case basis. The information provided in this paper serves as an introduction to encourage further research, as the complexities of financial innovations make them an interesting and compelling area of research.