Financial Innovation and the Financial Crisis – paper on Dublin

Two years in an edition of Tax Justice Focus contained a lead article entitled Shadow Regulation and the Shadow Banking System: the role of the Dublin International Financial Services Centre. It was written by Jim Stewart, Senior Lecturer in Finance, Trinity College, Dublin and it looked at the role of a tax haven / secrecy jurisdiction in the financial crisis, and we added it enthusiastically to our Economic Crisis + Offshore webpage.

Now we have just added a major new article to that webpage, which is effectively a thorough update of, and large expansion of, Stewart’s article. Entitled Financial Innovation and the Financial Crisis, it was published a year ago at a conference in Aalborg.

It will be one of the most important documents on our webpage and a major contribution to the literature on this essential topic.

It is all interesting, but perhaps the most relevant part begins on page 8 with the sentence

Financial centres such as the Irish Financial Services Centre (IFSC) formed a major part of the shadow banking sector.

and

“A further source of risk is poor or non-existent regulation. This is because of the location of ‘shadow banking’ type activities in off shore financial centres one of whose main advantages was ‘light touch regulation’ and in recognised tax havens such as the Cayman Islands. This source of risk typically only becomes apparent in a crisis. As a consequence when markets became aware of the risk associated with these firms, liquidity is reduced, increasing risk further.
. . .
Financial centres such as the Irish Financial Services Centre (IFSC) formed a major part of the shadow banking sector. “

And a whole lot more. Now read on.

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