Monetary Authority Chief Executive Joseph Yam says financial innovation is a good thing, but it requires fiscal authorities to remain alert.

In his Viewpoint column published today he said financial innovation, if properly harnessed with prudent risk management, can make financial intermediation more efficient. However, financial intermediaries often use financial innovation as a tool to pursue their private interests.

Mr Yam said improvements can be made in three areas:

* increasing transparency;

* requiring appropriate and reliable warnings; and,

* tightening scrutiny to ensure the quality of the underlying assets going into the production line of financial innovation is up to objective, minimum standards.

"I am hopeful specific proposals for improvement in all three areas will be forthcoming, although very much still in the context of the recent wave of financial innovation, which took the form of (sometimes incomplete) credit-risk transfer through the originate-and-distribute model of securitisation," he said.

"But there is always the possibility of another wave of financial innovation with totally different characteristics springing up and getting around whatever improved framework is established for ensuring financial stability. Financial authorities will need to be always on the alert."