Financial Innovation of Mass Destruction—The Story of a Countrywide FX Options Debacle

Anna Sławik,Joanna Bohatkiewicz-Czaicka

doi:10.3390/risks10020028

Abstract

Astonishingly little attention has been paid in academic literature to the 2008–2009 foreign exchange (FX) options debacle in Poland, the scale of which was unheard of. It affected not only an individual organization but a significant part of economy, being an example of a situation in which operational risk at the company level could have impacted systemic risk. The research provides evidence of the dark side of financial innovations through an analysis of a countrywide case on an emerging market, utilizing a primary qualitative content analysis (QCA) of over 750 documents (including press releases, public authorities’ accounts, and corporate statements). It documents that the FX options debacle was caused by financial institutions which shrouded some aspects of innovative securities or took advantage of information asymmetry to exploit uninformed clients. The study concludes that both adequate legal regulations and proper operational risk management are crucial to avoid similar corporate failures.

Highlights

Since the beginning of the 1990s, we have witnessed a number of derivative debacles—Barings Bank, Metallgesellschaft AG, Procter and Gamble, Amaranth Advisors LLC, SocieteGenerale SA, Codelco, Sumitomo Corporation, Daiwa Bank, National Australia Bank Ltd., and Allied Irish Bank PLC, to name a few
All of them highlight the importance of operational risk management, since the materialization thereof used to be the main cause of financial losses
The scale of that debacle was unheard of, since it affected an individual company, but a significant part of economy. It is an example of a situation in which operational risk at the company level can be a trigger of systemic risk

Summary

Introduction

Generale SA, Codelco, Sumitomo Corporation, Daiwa Bank, National Australia Bank Ltd., and Allied Irish Bank PLC, to name a few (see Jacque 2010; Marthinsen 2018) Those described so far in academic literature almost exclusively focus on a single organization operating in a mature market. Options debacle on the Polish emerging market from the perspective of the negative consequences of financial innovation. There is a limited number of papers examining corporate crises caused by derivatives in emerging markets. This can be partially explained by the fact that those markets are less transparent, and often a language barrier makes it difficult to analyze media releases, legal documents, or corporate reports. There is a research gap when it comes to analyzing the phenomenon by exposing the aspects of the dark side of financial innovation, by applying the rigor of textual analysis to the sources of information available to public opinion in the mass media, and by reflecting on the outlooks of various stakeholders (entrepreneurs, financial institutions, and public authorities, among others)

Objectives

Methods

Results

Discussion

Conclusion