While the real estate market was roaring, banks where feverishly competing to provide mortgages to the anxious American homebuyer. During the peak of bubble new “innovative” products were released regularly requiring less information from buyers and or more payment flexibility. Institutions that did not offer these “innovative” products fell quickly behind their competitors who did.
In every industry leaders are chased by lagers. In a top 10 list of an industry, 2 through 10 are always trying to take number ones spot. This competitiveness is what typically spurs “innovation” in an industry.
Banking is one business where “innovation” is more difficult to develop. Banks can and do develop”innovative” ways to service their customers more conveniently and efficiently without increasing risk. When banks develop “innovative” lending or insurance products, it is typically at the expense of increased risk.
Risk in banking during good times typically leads to increased profits. So during the good times typically banks look to increased product risk makes you more competitive. When times are tough, risk typically leads to losses. Then during bad times you could say reduced product risk typically makes you more competitive.
Innovation in banking is now more focused on reducing risk, since this improves their competitiveness during tough times. They are doing this by increasing lending requirements and raising fees. The US government has also attempted to reduce banks risk by artificially suppressing rates to keep the cost of lending down, therefore improving profit margins for banks.
Banks “innovation” on increased risk nearly put them out of business. Will their “innovation” on reducing risk finish them off?
