Banks and insurers should review and adapt their enterprise risk management to address the risk and uncertainties introduced by financial innovation, the World Economic Forum said yesterday.
In a report published yesterday in collaboration with Oliver Wyman, the forum said the importance of financial services to economic growth meant that, while innovation could bring benefits, the negative outcomes associated with it were 'too serious to ignore'.
By its very definition, innovation introduces uncertainty which can occasionally give rise to unintentional negative outcomes, Rethinking financial innovation, reducing negative outcomes while retaining the benefits explained.
These unintended consequences or negative outcomes cannot be predicted reliably for individual innovations, but can be addressed by making enhancements to existing governance procedures.
This, the WEF said, was best done by adapting existing risk management mechanisms and other processes to be more sensitive to the specific contribution innovation can make to uncertainty and risk.
Banks and insurers should start by carrying out a careful, step-by-step re-evaluation of the ways in which risks are counted, measured and managed, specifically emphasising the ways in which innovation introduces uncertainty.
They should also revisit new product approval processes to address the 'idiosyncrasies' of financial innovation properly, they report said.
Meanwhile, regulators were advised to acknowledge the important role innovation has to platy in a pro-competitive market place. They should, however, strengthen systemic risk oversight in light of the risks and uncertainties associated with financial innovation.
And, they should collaborate with industry to monitor and oversee efforts to manage innovation risks in a way that drives sustainable financial innovation.
Giancarlo Bruno, senior director and head of the financial services industry at the WEF, said: 'The world is currently facing a conundrum: on the one hand, financial innovation is broadly beneficial and is needed to address many of society's challenges; on the other, negative outcomes associated with financial innovation are too serious to ignore.'
