Innovation plays a key role in economic development, through the development of new products, new processes and in increasing productivity. The focus of this paper is on innovation in the financial sector in particular the development of the ‘shadow banking sector’ which has had a central role in the collapse of subprime and other funds. The subprime crisis and the emergence of the ‘shadow banking sector’ and subsequent collapse described in this paper are an example of a Minsky process. Some have argued that financial innovation, in particular financial innovation associated with risk management has been a major source of growth, in particular for the US economy and that financial innovation such as securitisation has been an extremely positive innovation for credit markets . In contrast Minsky argues that booms associated with financial innovation will inevitably lead to a subsequent collapse. Minsky states “Economies with financial innovations that are driven by market prospects are structurally conducive to booms and busts..” (Minsky, 1990, p 60). This paper examines one financial innovation - referred to as the shadow banking system, the essential feature of which is that it was either unregulated or subject to light touch regulation. The “shadow banking system” consists of non-bank financial institutions that borrow short term and lend long term , such as securitised investment vehicles (SIV’s), hedge funds, conduits, money market funds, etc. Low tax financial centres/tax havens are a key part of the shadow banking system. The paper examines in particular the role of the Irish Financial Services Centre in the collapse. Minsky argues part of the solution to instability through financial innovation is through regulation that is by constraints on debt levels both for the personal sector and the corporate especially the financial sector. This paper argues that financial innovation undertaken in conjunction with institutional change may be long lasting and to have considerable favourable economic effects. Financial innovation that is not associated with institutional change will not be long lasting and will eventually result in financial collapse.