Transcript 3. Financial System Size - Friends Provident Foundation

Rethinking Financial Systems
Resilience
Friends Provident Foundation
Tony Greenham, 9th July 2015
Research Objectives
• Resilience poorly defined in existing policy debate as strength
of individual banks
• Broader definition – ‘ability of the financial system to adapt
while maintaining socially useful functions within ecological
limits’
• Research objective:
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develop holistic indicators of FSR
to track progress over time and
to assess new policies, innovation and regulation
scope: banking sectors of G7 economies
• Methods: literature review, expert roundtables and
interviews, thinking.
6 new indicators of FSR
Factor
Measurement
1. Diversity
Concentration ratio; ownership
type
Exposure to financial and
international sector
2. Interconnectedness
3. Financial System Size
4. Asset composition
5. Liability composition
Assets/GDP; Household
debt/GDP
Productive credit ratio
Non-core funding/GDP
6. Complexity/transparency
+ Leverage ratio
Securitization/GDP
Equity capital/Total assets
FSR Index: Country Ranking (2012)
Composite International FSR Index
A vulnerable financial system:
large, homogeneous, interconnected, international, opaque
A resilient banking system
diverse, modular, transparent, domestic, real economy
Diversity: ownership
Deposits held by non-shareholder banks
Diversity: market concentration
Market share of top 3 banks
Policymaking for resilience
Rethinking FSR
• Resilience needs redefining beyond individual bank’s
stability
• Financial system is a ‘complex adaptive system’
connected to real economy
• Better metrics are needed to measure resilience
• Multi-criteria analysis more suited to understanding
key trade-offs and uncertainties – diversity,
complexity, size
• Further research needed!
Connection with local economic resilience
• Nature contains nested systems
• Economic systems are nested at
different spatial scales
• Diversity is the bedrock of systems
health at all scales
• Global financial system resilience is
inextricably linked with diversity of
local economic institutions
• An insight that is completely lost to
contemporary policymakers!