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Financial innovations in a programming framework (London Clearing Banks 1965-85)

Vlachakis, J. (1990). Financial innovations in a programming framework (London Clearing Banks 1965-85). (Unpublished Doctoral thesis, City, University of London)

Abstract

The structure of financial systems is not static but it is under a continuous process of change. Financial innovation is the key word behind these structural changes and a word that is increasingly attracting- considerable attention recently. We can observe a rapid acceleration in the pace of financial innovations in the last ten to fifteen years. As Ian Cooper (1986, p.1) vividly puts it:

Any measure of the volume of financial innovation would register an explosion in the last ten years.

This acceleration in the rate of change in the structure of financial systems is also observed in the case of the UK where: the ...financial system is experiencing change unprecedented in its scope and pace. (H. Rose, 1986, p. 18). The bibliography on the subject has also increased significantly in the last ten years or so. Most of the papers on this subject are dealing with the implications of innovations on monetary policy issues such as the stability of the demand for money and control of the money supply. T. M. Podolski (1986), argues that:

The present economic environment both increases the inducement and enhances the capacity of financial agents to innovate and thereby circumvent monetary regulation and control. Current macroeconomic policies based on the presumption of our ability to identify and to control the money supply must, in this situation, be reviewed fundamentally, for financial innovation alters unpredictably the relationships between variables, upon whose stability the effectiveness of monetary control depends.

Fewer papers are examining the causes and the whole process of financial innovations. One of the major theories in this area (a more extended exposition of theories and relevant studies on financial innovation will be given in 1.3) is Silber's "constraint induced innovations" approach (1975). Ben Horim's and Silber's paper (1977) is one of the very few attempts to empirically test a theory of innovations.

This thesis is concerned with presenting and analysing the microeconomic side of the process of financial innovation and attempts to empirically test the constraint induced innovations hypothesis for a particular group of UK financial institutions, the London Clearing Banks. The remaining of this chapter gives the definition of 'financial innovation' that is adopted in this study and reviews the major issues related to and theories of financial innovations. Chapter II provides a general overview of developments in the UK financial system with particular emphasis on bank innovations appearing in the 1960-85 period. Three main periods are examined: the early period (17th century up to 1960), the 1960s and the 1971-85 period. In chapter III we examine the major constraints on bank portfolio management. A more detailed account of regulatory constraints on liquidity and capital adequacy is given. In chapter IV we review the literature on models of bank behaviour with particular emphasis on asset management models and portfolio models. The methodology and objectives of the study are presented in chapter V. In chapter VI a detailed description of the models is presented while chapter VII summarises the empirical results from the models' simulations. Finally, in chapter VIII an overall appraisal and discussion of the results of the empirical study is offered together with the suggestion of an alternative approach.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Bayes Business School Doctoral Theses
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