Financial Innovation and Risk management – FINRIS

The objective of this research proposal is to investigate the impact of technological innovation on risk management in financial institutions. Progresses in information technologies have had a profound impact on the functioning of financial systems, from new financial products (structured products) to new players (electronic payment providers) to new governance structures (blockchains). These changes have altered the risks that financial institutions face and the instruments at their disposal to manage those risks. In this proposal, we want to use tools from game theory, information economics, industrial organization and experimental research to model these new risks and to understand the incentives of existing and new players in the financial system to control them. We plan to study financial as well as operational risks with a particular emphasis on the increasingly important role of data management in finance.
This proposal is divided into three parts. In the first part we want to investigate how financial innovation affects the externalities that financial institutions exert on each other. In this part, we focus more specifically on the speed at which markets operate and the ability of firms to diversify risk. In the second part we want to study how new governance structures may emerge for financial firms. First, new technologies like blockchains provide an architecture for new decentralized financial platforms. Second, the ownership and governance of data becomes increasingly central for FinTech firms. Finally, in the third part, we want to focus on financial data breaches and how they affect the reputation of financial firms and the decisions of consumers.