What is the issue?
Over the past few decades the financial system has been transformed from one of predominantly national and local institutions specialising in different functions, markets and geographical areas to one dominated by global banking institutions that span many different businesses and are increasingly interconnected.
Theory and evidence both suggest that these changes will impact the resilience of the financial system. The resilience of financial systems to shocks has become a more prominent policy question since the global financial crisis of 2008. Diversity is a key component of systems resilience and the benefits of banking diversity are well grounded in evidence. Within the UK there is a developing political consensus that greater diversity of banking institutions would be beneficial, alongside a primary focus on increasing competition to improve the performance of the banking system.
However, two issues remain unaddressed:
- First, the relationships between competition, diversity and resilience require greater clarity.
- Second, even if the goal of a more diverse and resilient financial system is well understood and widely shared, how can we tell how far we are from this goal, or even whether we are moving in the right direction?
Without appropriate ways to measure and understand the impact of such changes, there is a real danger that the well-intentioned aims of increasing competition could actually damage financial system resilience.
What will the project try to achieve?
This project will help to answer these questions by creating and publishing measures of financial system resilience (FSR) building on the work of Professor Jonathon Michie, University of Oxford and Professor Christine Oughton, SOAS University of London. Their index of diversity within UK financial services (the D-Index) will be continued and extended. This will comprise three areas of work.
1) Calculation and analysis of resilience indicators based on historical data. This is the main research part of the project, and will have three steps:
- Updating the existing UK time series data (2000 to 2011) for the D-index
- Broadening the UK data to include additional resilience measures
- Compiling a simple international measure of FSR to allow comparison with other countries
2) Assessing future impact of market and policy developments on system resilience. We will start to develop a process by which the indicators framework can be used to assess the future impact of changes in markets, business models, institutions and policies.
3) Dissemination of findings. The results will be disseminated to policymakers, media, academics and civil society audiences.
Who might be interested in this project?
The methodology and findings of this project will be of interest to:
- policymakers who are interested in progress towards greater diversity and resilience of the financial system
- civil society organisations who can use the index to hold policymakers to account for delivering this aim
- academics studying systems resilience.