DEFINITION of 'Financial Innovation'

Advances over time in the financial instruments and payment systems used in the lending and borrowing of funds. These changes, which include innovations in technology, risk transfer and credit and equity generation, have increased available credit for borrowers and given banks new and less costly ways to raise equity capital.

BREAKING DOWN 'Financial Innovation'

As seen with the global credit crunch sparked in 2008, which was triggered at least in part by innovative financial products such as exotic ARMs, there will always be a need for careful scrutiny of innovative financial products and their risks.

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