Preserving a diverse banking system

University of Southampton researchers

Regulations intended to reduce the risk of bank bailouts following the financial crisis of 2007-09 are leading to a consolidation in the global banking sector, which is becoming less diverse.

This consolidation process is also driven by the need to achieve cost containment, deleveraging, and restructuring. This lack of diversity is a serious risk – a homogeneous banking sector is more vulnerable to a systemic risk of collapse than a healthy diversified one.

These new regulations may reduce the risk of bank bankruptcies, and can lead to more capital and liquidity-efficient business models and products. However, they are likely to harm smaller banks, and some jurisdictions are advocating the aggregation of small banks, particularly cooperative banks, to reduce the associated risks.

However, small banks play a major role in lending to SMEs, which larger banks are less likely to do. Reducing or removing small and local banks may harm this key element of the economy as well as reducing diversity in the banking sector as a whole.

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