An evolutionary game theory model for the inter-relationships between financial regulation and financial innovation

Internet finance is a new type of financial industry that is different from traditional finance. This study constructs an evolutionary game model between financial regulators and Internet financial institutions and discusses the strategy choices of the two participants under different circumstances. When analyzing the stable equilibrium strategy, the results show that when there are stable points in the game, Internet financial institutions tend to ‘excessive innovation’, while regulators’ strategies are affected by costs and benefits. When there is no stable point in the game, financial regulators and Internet financial institutions are in a continuous game of ‘moderate innovation – maintenance regulation – excessive innovation – strengthen regulation – moderate innovation.’ The study also provides policy recommendations to balance Internet financial innovation and regulation.

After the financial crisis in 2007, the high risk brought by financial innovation has aroused widespread concern and thinking again. The measures to curb financial innovation in various countries have become increasingly severe. However, under the background of the supply-side reform proposed by the Chinese government, the reform of the financial capital elements of the supply root is imperative. Therefore, how to curb the risk of innovation in financial institutions effectively, while encouraging innovation in favor of financial supply side of the reform of compliance, become an important issue to be solved. Based on the limited rationality, the long - term dynamic game equilibrium between financial institutions and regulators and its impact on financial system and financial market is analyzed by constructing asymmetric evolutionary dynamic game model. Then, analyzing the relevant factors of long-term equilibrium, and puts forward the regulatory measures which are conducive to encouraging the reform of compliance and the reform of financial supply-side.

The loose financial supervision and excessive financial innovation will lead the country to heavy losses in financial crisis. So how to balance the relationship between financial supervision and financial innovation and make financial supervision and financial innovation to achieve complementary has become a hot issue. The financial supervision and financial institutions are a process of repeated game, but the research on them is still in a superficial stage. Therefore, this paper uses evolutionary game theory and method to analyze the dynamic replication system of asymmetric evolutionary game of two groups of financial institutions and regulators in China. And the evolutionary stable state of the system under different conditions is analyzed. The conclusion is that under different parameter values, the other side adopts different strategies, and the system will tend to different equilibrium states.

PurposeThe financial industry offers a unique setting to study innovations. Financial innovations have fueled the growth of economies, markets and societies. The financial industry has successfully become the breeding ground for innovative services, processes, business models and technologies. This study seeks to provide a holistic view of the literature on financial innovations, synthesize the research findings and offer future directions for research in light of three market developments that are disrupting the industry and opening up a new era for the financial services industry. Disruptions from within and outside the industry offer new generations of radically innovative services. Moreover, new generations of consumers differ from previous generations in their needs and wants and look for innovative ways to handle their financial needs. Finally, significant developments related to financial innovations have emerged in Asia and developing countries.Design/methodology/approachThis study systematically reviews the academic research literature on financial innovations in two phases. The first phase provides a quantitative review of 546 journal articles published between 1990 and 2018. In the second phase, the study synthesizes the extant research on financial innovations and maps them in five research areas: firms' introduction and adoption of FIs, financial innovation development, the outcomes of financial innovations, regulations and intellectual property, and consumers.FindingsThe analysis found that disciplines differ with regard to the employed research methodologies, the units of analysis, sources of data and the innovations they examined. A positive trend in the number of published articles during this period is observed. However, studies have primarily focused on the USA and Europe and less so on other parts of the world. The literature synthesis further identifies research gaps in the available research that highlight future research opportunities in light of the three market disruptions. The financial services industry is on the brink of a new era due to disruptions from within and outside the industry and the entrance of new generations of consumers. Moreover, the financial industry has successfully become the breeding ground for innovative services, processes and business models. Therefore, financial innovations offer promising opportunities for bridging the gap between research on product and service innovations.Research limitations/implicationsThe work provides a holistic and systematic overview of extant research on financial innovations and highlights future research opportunities in light of the three disruptive market developments. It helps researchers take advantage of the opportunities in studying financial innovations while maintaining industry relevance.Originality/valueThe study is the first to review and synthesize the academic research literature on financial innovations across marketing, finance and innovation disciplines. In addition, the study highlights three primary disruptive forces in the financial industry and identifies future research directions in light of these disruptive forces.

PurposeRecently, the concept of financial technology (FinTech) has attracted extensive attention from international organisations and regulators, in particular, how to achieve a “win–win” situation between financial institutions' FinTech innovation and effective regulation has become a hot topic. This study purposes to explore the evolutionary game relationship between FinTech innovation and regulation by constructing both static and dynamic earmarking game models.Design/methodology/approachA simulation experiment was conducted using primary data obtained from a commercial bank in China.FindingsThe results of the theoretical analysis of evolutionary game models were consistent with the corresponding simulation results, proving the validity of the proposed evolutionary game models. It was also found that the dynamic earmarking game model was more stable and effective than the static earmarking game model in promoting FinTech innovation and regulation. Furthermore, when the regulators utilised a dynamic earmarking mechanism, the evolutionary path of financial institutions and regulators' behaviour strategies took the shape of a spiral and eventually converged to a central point, indicating the existence of an evolutionary stable strategy and Nash equilibrium. Finally, because the behaviour strategies of financial institutions were mainly influenced by the regulators' policies, the regulators were inspired to adjust the corresponding regulation policies on FinTech innovation.Originality/valueThis study bridges the knowledge gap in the existing literature on financial innovation and regulation, in particular by establishing evolutionary game models from the perspective of financial earmarking policies. Also, the case study for simulation experiments can gain a more intuitive insight into FinTech innovation and financial earmarking policies.

This paper discusses the relationship between financial regulators and financial innovation institutions in three game models. In the equilibrium analysis of these models, we study the influence factors of financial innovation and regulation and the interaction between these factors. According to the equilibrium result, the paper draws the conclusion that regulators can design the embedded regulatory system——intensity of supervision and penalties—— to influence the strategy choices of the game participants. Finally, the paper gives some suggestions on how to strength the regulation for real estate financial innovation.

Open Banking: Regulatory challenges for a new form of financial intermediation in a data-driven world

I agree with just about everything Jonathan Macey (2017) says in his symposium contribution. His claim that bureaucratic tendencies toward regularity—specifically, treating like cases alike—generate errors in categorization seems appropriate to me. His explanations of the pathologies in financial regulation should fall in the category of essential or required reading for anyone who chooses to write on the topic. Where I differ from Macey is in the choice of framework, or perspective from which to view the pathologies. Whereas Macey adopts an “error cost” framework, which is clearly appropriate for this symposium, I would build explicitly on a “public choice” framework.

The Precautionary Principle: Financial Regulation's Missing Ingredient

With the rapid development of Internet technology, the integration of the Internet and the financial industry has gradually deepened. Internet finance has developed for many years in China, but there are deficiencies in the supervision of Internet finance. This paper builds an evolutionary game model of Internet financial enterprises, regulators, and financial consumers. This paper studies the relationship between financial enterprises, consumers, and financial regulators using the replication dynamics equation. Research shows that regulators, consumers and enterprises will reach a steady state after a series of evolution. On the basis of the theoretical model, this paper tries to make some suggestions to regulators.KeywordsInternet financeEvolutionary gameFinancial regulation

The global financial crisis that started in 2007 sparked several academic debates about the role that financial sector regulators played in the crisis and prompted policy reforms in the financial supervision architectures of several countries. This book focuses on the question of what accountability, independence, transparency and, more generally, governance mechanisms applicable to financial regulators can better contribute to building responsive, responsible and effective regulatory and supervisory frameworks that tackle the weaknesses of the pre-crisis regimes. It re-visits the concepts of accountability and independence of financial regulators as well as the main economic theories underlying financial services policy-making, in light of the crisis experience. In addition, it critically examines the post-crisis institutional frameworks of financial regulation and supervision in the EU, the US and Canada with a view to assessing whether the financial regulators of the post-global financial crisis era are well suited to effectively address the challenges and threats that global financial markets pose to the stability, integrity and good functioning of financial systems as well as to the protection of consumers, investors and society at large.Topics addressed in this volume include:- The theoretical foundations of accountability and independence in financial regulation after the crisis; - The influence of economic theory on the quality of financial regulation and supervision;- Accountability in the European Banking Union and the European System of Financial Supervision;- Post-crisis structures of financial regulation in the US and their impact on consumer/investor protection and financial stability;- The role of financial supervision architecture in the stability of the Canadian financial system. The contributors to this volume are economists, lawyers, political scientists and sociologists from both academia and practice. Therefore, this book will be highly relevant to scholars and practitioners in these areas.

The Rationale for a Single National Financial Services Regulator

Research on Financial Innovations: An Interdisciplinary Review

Reviewed by: A History of Financial Technology and Regulation: From American Incorporation to Cryptocurrency and Crowdfunding by Seth C. Oranburg Florian Vetter (bio) A History of Financial Technology and Regulation: From American Incorporation to Cryptocurrency and Crowdfunding By Seth C. Oranburg. Cambridge: Cambridge University Press, 2022. Pp. 200. This book is an important contribution for financial historians insofar as it shifts away from a purely institutional perspective. At first glance, Seth C. Oranburg's work appears to reconstruct the milestones of the regulations of the U.S. financial markets and their transformation through the introduction of technology. However, a closer reading reveals that the author focuses on a large panorama of actors such as investors, state institutions, financial institutions, and small investors. In doing so, Oranburg highlights that ordinary investors and small businesses are often left behind when it comes to investing. He argues that today's regulatory apparatus in America is incredibly cost intensive for the taxpayer, leads to disparities in wealth, and makes it almost unprofitable for new actors to enter financial markets. Oranburg's book distinguishes itself from other works of financial history by its analysis of the intertwining of regulation and technology. The author bases his arguments mainly on current literature, quotations, advertisements, and photographs. The work covers the period between the 1790s and 2020. After a brief introduction, Oranburg introduces the key concepts of financial regulation and digital investment strategies in eleven chapters. The book focused on the intertwining of technology, regulation, and various actors within the American financial market. In addition, Oranburg demonstrates how laws and regulations prevented financial crises but also caused them. The history of corporate finance and financial markets in the United States is described across three epochs. The author shows that the first era (1790s–1930s) was characterized by capitalism and individualism. It becomes clear that between the 1790s and 1930s, the United States consisted of many unconnected financial markets. However, the advent of technologies such as the railway or the telegraph helped the individual states to grow together into an economic union. Consequently, the advent of technology led to the fact that financial crises took place on a national scale in the United States. The second era (1933–2008), according to the author, was characterized by a centralized command and control approach to securities regulation. Furthermore, the Great Depression had a significant impact on political and economic change in the United States. Here, Oranburg describes how the U.S. government created new federal agencies to counteract inflation after Franklin Delano Roosevelt became president. The Securities and Exchange Commission (SEC) serves here as a case study to demonstrate how the growing federal bureaucracy became increasingly costly for the taxpayer. Thus, it becomes clear that the international crisis also led to centralization and consolidation [End Page 615] in the United States. As a result, New York rose to prominence as a financial center. Silicon Valley started to flourish as investors began to invest in new companies and start-ups instead of publicly listed companies. During this period, America's middle class also began to benefit from these regulations and changes as corporate profits seemed to flow into a growing middle class. From the 1990s onward, Oranburg highlights a fundamental change in investment. Until this time, stocks were primarily owned by large corporations rather than individuals. The author concludes this period with the dot-com era (mid-1990s–2000s) and illustrates through the resulting financial crisis in 2000 how domestic stock markets were reregulated to prevent further crises. In the third era (2008–20), Oranburg uses Bitcoin, social media activism, decentralized finance, and crowdfunding as case studies to show how financial regulation has fallen far behind financial technology. In doing so, he skillfully builds a bridge from the Great Depression to the digital age. He demonstrates that federal laws to regulate communication about investment opportunities from the beginning of the twentieth century are now no longer applicable. Oranburg has managed to write a book that offers financial historians as well as nonspecialists new perspectives. By adding simplified examples of economic theory in each chapter, the book serves as a good introduction for readers outside the field of financial history. These examples help...

This article tries to examine possible rational payoffs of cooperative and non-cooperative interaction between the financial regulator and companies in the financial technology industry. To understand the interaction paradox within the financial technology industry, a framework based on Game Theory Prisoners Dilemma Payoff Matrix is used to iterate conditional probabilities that represents the possible decisions given by both the financial regulator and the fintech companies. The possible decisions and consequences of cooperative or non-cooperative decision from each of the player, are encoded into a 2 X 2 matrix to illustrate the conditional probabilities, then analyzed to find the best interaction option. Indonesian financial regulators have not provided clear regulations about the financial technology industry on broad terms inclusive of major types of fintech businesses commonly found in Indonesia. Indonesian financial regulators represented by the Bank Indonesia (Indonesian Central Bank), Ministry of Finance, and Otoritas Jasa Keuangan (Financial Services Regulator), only enacted regulations for certain types of fintech, such as peer-to-peer lending, digital banking, and digital payments. Many other types of fintech have not been regulated or inadequately regulated for business boundaries, liabilities, and obligations toward the consumers. The financial regulators mostly rely on enforcement efforts to fulfill the mandate to promote innovation, protect market integrity, ensure clarity in the market. However, these enforcement actions have potential harms to the mandate if the financial regulators cannot provide clear regulations or ensure enforcement predictability, transparency, and consistency. The best possible rational option for the legal interaction between financial technology companies and financial regulators would be to cooperate. The second-best option would be the company cooperating while the financial regulator does not cooperate. The third option would be both the company and the financial regulator do not cooperate. The least beneficial option would be for the company not to cooperate while the financial regulator cooperates. This article presents a possible contribution to corroborating the conjecture that the best possible rational option for the legal interaction between financial technology companies and financial regulators, would be to cooperate.