In September the BSA held its second research symposium, kindly hosted by Cass Business School, London.
A major theme of the day was diversity in financial services, but of corporations rather than people.
We heard from researchers developing analyses on how diversity can be defined and measured, and why it matters.
Some of the points discussed are summarised below. The slides can be found here.
The impact of diversity
Sandra Challita presented research, co-authored by Rym Ayadi, that sought to assess the extent of corporate diversity across Europe, defined as a mix of structures and business models in an economy. Their initial findings suggest a positive relationship between diversity and both economic growth and economic stability.
Similarly, Christine Oughton showed preliminary findings from a model that brings together mutuals which seek to maximise consumer welfare with profit-maximising firms, and which suggests that diversity of competition improves consumer welfare.
Hans Groenveld is developing how the contribution by Rabobank to diversity in the Dutch market could be broken down into constituent parts, ranging from asset growth to profitability.
And Francois Benhmad and Thuy Seran, again with Rym Ayadi, discussed their approach to investigating whether the extent to which a co-operative bank was a hybrid with profit maximizing bank affected how effectively it delivered its social mission.
Another perspective was provided by John Wilson, presenting a study of where the tax subsidy enjoyed by US credit unions flows. He and his co-authors found that most of the subsidy passed to credit union members, as was the intention behind the policy, though some is also funding potentially inefficient operations.
Diversity in business activities
Presenting a chapter from a new book, Marco Migliorelli assessed the extent to which European co-operative banks continued to lend through and after the financial crisis. While this was found to be the case in the North East of the euro area, including Germany, it was not the case in other parts of the euro area where the crisis had a more severe impact: here losses on loans had depleted capital, and cooperative banks cut back on lending to support capital ratios.
From the same book, Eric Meyer discussed the impact of the low interest rate environment on co-operative banks in Europe. Though the effects differ across the various structures of co-operative banks across Europe, there has been a general tendency for net interest margins to reduce, given the importance of loans on cooperative banks’ balance sheets. Cost reduction and declining loan loss provisions have supported profitability, but may not be sustained. There has been little diversification into non-interest income, so the pressures look set to persist.
In an analysis of building society savings deposits, John Ashton and co-authors investigated the relative role of interest rates and other non-price factors in attracting deposits. They found that regulators and monetary policy-setters would benefit from considering both price and non-price factors such as branches and features of the products offered, rather than only price factors.
John Sutherland stressed that merely designing a diverse system isn’t a cure-all for good culture and governance. Instead, effective boards of directors must try to ensure that behaviours are being encouraged which match the stated purpose of the organization with what is being delivered to customers.
Olivier Butzbach discussed how diversity could be preserved. He highlighted the importance of institutional arrangements, such as policy normalization which can push towards homogeneity, whether intentionally or not. As well as the arguments for banking diversity of greater systemic stability and better consumer outcomes, banking diversity may also support balanced economic growth at a regional level.
Giorgio Caselli noted the revival in Europe of the principal of proportionality in the regulatory sphere, out of a recognition that one-size-fits-all is not optimal. As is understood in biological ecology, diversity should be not be reduced without due consideration, as we don’t know how different structures will be relevant or useful as the world changes.
Overall, the event shone a light on the role of corporate diversity in financial services, and the varied research seeking to better assess and understand its importance.