Financial Innovation and Financial Risks

Abstract

This study examines research on the role of financial innovation in banking and its implications for a bank's financial soundness. A literature review and mathematical simulation was carried out in Excel, to examine and identify the relationships between financial performance and efficiency and stability. The simulation is divided into 4 parts: 1) the bank is not innovating, 2) the bank is innovating to reduce costs, 3) the bank is innovating to stimulate demand, 4) the bank is innovating to reduce costs and stimulate demand. The use of simulation allows you to obtain comparable data for any period.Analysis and simulation results show that innovation leads to different consequences. Cost cutting innovations help the bank to increase its equity capital faster and reduce risks. On the other hand, innovations that stimulate demand lead to an increase in income and a decrease in the share of equity capital. The study allows researchers to better assess the impact of modern innovations in the banking sector. As far as the authors know, this research format is one of the most promising areas of research in economic activity in general, and banking in particular.