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Research paper

Jonathan Michie and Christine Oughton

097_DP113 Measuring Diversity in Financial Services Markets: A Diversity Index

JEL Classification:

G, G2, G3, L1, L2, L3


Recent research on financial stability and economic welfare has highlighted the role of 'diversity' in promoting stability and improving the competitiveness of the financial sector. This research has been influential in shaping policy; for example, in 2010 the UK government specified the promotion of diversity in financial services as a policy objective. However, there is at present no established measure of diversity in financial services that can be used to ascertain the extent of diversity and changes over time. The main purpose of this paper is to fill that gap. In this paper we propose an index of diversity in financial services that is based on four sub-indicators: ownership diversity; competitiveness; balance sheet structure/resilience; and geographic spread. The first of these sub-indicators represents a new measure of ownership diversity that is based on the Berry index of diversification and the Gini-Simpson index of bio-diversity. It measures the extent of diversity in ownership types – banks, mutuals and the government owned NS&I – where each of these types has discernably different objectives so that there is diversity in behaviour. Our second indicator is designed to capture the extent of competition and is based on the inverse of the Hirshmann-Herfindahl index of concentration. Our third indicator measures diversity in balance sheet structures and resilience across the sector; while our final indicator captures the extent of geographic spread and the regional concentration of financial services. These indicators are combined into a single index – the D-Index – that measures diversity in financial services. We report the movement in this index from the year 2000 to 2011. The D-Index shows a marked decline in the run-up to the 2007–2008 credit crunch, followed by more significant falls during 2008 and 2009. Since then the index has remained more or less flat. As a result, we are no closer to creating the conditions – of diversity – that have been identified as constituting an important component of avoiding a repeat of the credit crunch. The D-index provides for the first time a measure of corporate diversity in the financial services sector, and offers policy makers a means of tracking movements in diversity.

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