Question

How does the emergence of interest-rate risk help explain financial innovation?

Short answer

Financial institutions had to research and develop new products/services that would meet customers" needs in the changing economic environment to be profitable.

Step-by-step solution

Concept Introduction

An increase in interest-rate riskincreases the demand for financial innovation.

Explanation

Interest-rate risk emerged in the $1960$s when changes in the economic environment made inflation and interest rates harder to predict. Banks no longer found their old methods of doing business profitable and knew that they had to change their ways because the financial services and products they had been offering to the public were not selling. As a result, financial, had to take place.

Final answer

Financial institutions had to research and develop new products/services that would meet customers" needs in the changing economic environment to be profitable.