An Analysis Study Of The Relatioship Between Financial Innovation And Financial Supervision

Since its emergence in 1970s, financial innovation, together with financial supervision, has gained a steady development under mutual influence. On the one hand, it vitalizes the financial market and improves the efficiency of economic operation; on the other hand, it brings destabilization to financial system, increases the risk, and thus weakens the validity of financial supervision while requires more on its content, idea, and means. As a result, the spiral development increasingly deepens financial innovation and improves financial supervision. Not until the relationship between the two is properly balanced,shall we realize a virtuous circle of "supervision-innovation-supervision-innovation", a key point in financial security and efficiency.Based on an analysis of the mutual influence, this thesis introduces a case study of the dynamic game in the developed countries. While integrated with a mutual relationship analysis, the thesis mainly focuses on the game procedure:the procedure and conclusion of static game with perfect information (SGPI), static game with imperfect information (SGII), and dynamic game with perfect information (DGPI), formed under different information condition and operation sequence. Finally, countermeasures for the dynamic equilibrium between financial innovation and financial supervision in China are proposed according to the game theory and China's specific issues in innovation and supervision.In the case study, the different stages of dynamic game were illustrated: 1930s-1970s:"supervision-innovation-"; 1980s-1990s:"-supervision - innovation-supervision-"; and recent decades:"-innovation-supervision-", i.e., excessive innovation of financial products led to financial crisis, which correspondingly taught a lesson to American government to improve financial supervision.In the game model, it is demonstrated in SGPI that game equilibrium is related to such variables as incentive and restraint mechanisms (IRM), supervision cost and profit, and innovation cost and profit. It is suggested that 1) establish complete IRM in financial and supervision institutions; 2) increasingly improve financial supervision system and lower the cost; 3) promote and deregulate financial innovation. SGII shows the importance of complete information system and disclosure on game equilibrium, and that imperfect information will lead to an unbalanced status of supervision and innovation, and a loss of profit and efficiency. According to DGPI, supervision authorities should maintain the stability of the financial system and distinguish between effective risk prevention and risk elimination. Moreover, supervision does not mean inhibition and outdated restrictions should be relaxed. Consequently, measures should be taken to strengthen financial security, i.e., establishing a comprehensive risk supervision auto-regulatory mechanism.Grounded on the analysis of the game model, the thesis tries to explain the main reasons for the non-optimal game equilibrium between innovation and supervision in China:1) incompleteness of the Financial Supervision Information System; 2) less motivation, higher costs; 3) absence of a dynamic environment for innovation. Finally, it proposes relevant countermeasures for the dynamic equilibrium between financial innovation and supervision in connection with the game theory and China's specific issues:1) enhance information disclosure and construction of financial information system; 2) improve financial supervision procedure; 3) establish effective supervision system; 4) reinforce international cooperation on financial supervision; 5) deregulate financial institutions and promote the development of financial innovation.