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Show 269 THE UNIVERSITY OF UTAH Financial markets are dynamic. The ever-changing landscapes of these markets create in-formational inefficiencies, which are problems that afford opportunities for innovation and spawn governmental oversight and regulation. Governmental oversight and regulation always change the efficiency of the markets they address. There is a tradeoff of costs and benefits be-tween innovation and governmental oversight or regulation. Where these activities improve efficiency, they decreases costs for market participants, but where they create greater ineffi-ciencies, they foster greater costs. Avoiding these costs has been the driving force for banking to migrate into the Shadow Banking System. The question of why financial markets require innovation to remain efficient is addressed in the first section of this paper. An in-depth description of the nature and purpose of specific financial structures and of the financial instruments that are utilized in the Shadow Banking System are explored. This discussion provides a brief historical account of the creation and growth of the Shadow Banking System. It explores the connection between the solutions that innovation brings to the problems inherent within the system. These solutions are compared to governmental supervision or regulation, since both seek to address these same problems. The second section examines the relationship of innovation within the Shadow Banking System to the recent Real Estate financing marketplace. It uses the Financial Instability Hypotheses of Hyman P. Minsky to give insight into the motivations and actions of investors and borrowers that fueled both the housing bubble of the early 2000s, and the accompanied Housing Crisis of 2007. The paper ends with an examination of the future of the Shadow Bank-ing System and concludes that crisis is a hidden cost that is inherent within the system. FINANCIAL INNOVATION OF MORTGAGE FINANCING INSTRUMENTS AND OFF-BALANCE SHEET BANKING Richard L. Pater (Lance Girton) Department of Economics University of Utah honors college Richard L. Pater Lance Girton |