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Why should we care about diversity in financial services?


However, in less extreme times competition and stability can reinforce each other, and diversity of provision can help bring this about. With effective competition from a range of providers with business models strong enough to thrive and sustain on their own merits rather than via implicit or explicit Government support, the system as a whole can be more robust to sudden changes and better at coping with another firm’s failure.


Reforms to promote diversity


Many of the reforms introduced since the financial crisis such as ring-fencing and changes to the resolution regime aim to make large, complex banks more easy to resolve so that the risk they pose to the system as a whole is reduced and so that the taxpayer is not obliged to stand behind them if they run into trouble. For the reasons described above, promoting diversity can be an important complement to these reforms, helping to make them more effective.


However, breaking the “too big to fail” problem is itself imperative to promoting diversity, not just because the implicit guarantees some banks enjoyed represented a barrier to smaller challengers, but also because of the excessive influence it provided, granting the largest banks strong political bargaining power. The result was that policy making and regulations reinforced the dominance of one particular model rather than permitting alternative approaches to thrive.


Promoting diversity does not necessitate favouring certain models or approaches. Instead, barriers to entry and expansion should be lowered for all providers. Policy and regulations should have a neutral effect on different types of businesses’ ability to compete. If a certain offering takes market share, it will be up to other firms to respond to that rather than for the market to be segmented by policymakers on an artificial and arbitrary basis due to subsidies or discrimination.


Promoting diversity and changing the balance of power in financial services will be difficult and face considerable resistance. However, the decline in the Oxford Centre’s measure of diversity suggests more work is necessary to ensure different types of financial service provider are free to compete.


An index of corporate diversity in financial services


The BSA commissioned academics at the University of Oxford Centre for Mutual and Employee-owned Business to compile a measure of corporate diversity in the mortgage and savings markets.


Diversity as measured by the index has declined in both markets from 2004, prior to the financial crisis, as shown in the chart. Actions taken in the crisis then exacerbated this decline, though diversity has stabilised in the most recent years covered by the analysis. By the end of 2011 the diversity index was measuring around 82 in the mortgage market and 85 in the savings market, both down from 103 in 2004.


This aggregate diversity index is composed of four individual indices measuring changes in various factors of diversity:


• Corporate ownership: is the market divided between shareholder owned banks, customer-owned mutuals and State-owned institutions?


• Firm size: is the market dominated by a few large firms or many small firms?


• Approach to funding: are financial institutions reliant on wholesale or retail funding?


• Geography: are firms based in the same locations, or are their headquarters spread out through the country?


Each of these measures of diversity was found to be lower in 2011 than in 2000, the first year in the analysis, indicating that both the mortgage and savings markets became more concentrated in larger, wholesale funded, London centred shareholder owned banks over the period.


Sponsored by www.bsa.org.uk 19


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