The financial crisis of recent times was arguably triggered by innovation in the financial services sector around creative financial instruments. These so-called CDOs and ABS' ended being unhinged from the underlying 'assets' that defined them and as such allowed a bubble of securities and subsequent contractual trades by professionals and institutions creating 'value'. The fact is that this innovation probably started with the various rounds of deregulation of financial services, including the repeal of the Glass-Steagall Act in 1999. While some argue that this deregulation actually prevented a worse meltdown of the financial system, I would argue that regardless it allowed the creation of innovative financial instruments that ultimately led to the creation of a new class of speculative bubble - as if we need more excuses for those...
Innovation in financial instruments, in trading platforms and in margin creation is the wrong sort of innovation for banks to be focusing on. They need to be focused on organizational reform that rebuilds banks around customer engagement and interaction. Unless we see this sort of innovation it won't matter how advanced the financial mathematics and instruments get - in the end if your customers are finding ways to work around your inadequacies you might just find you have no business...
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