Learning from Biodiversity: Is Diversity in Financial Ecosystems Important for Economic Growth and Stability?

We propose a new measure of financial system diversity inspired from biodiversity research and explore its potential benefits for growth and stability. Our measure captures the relative contributions of various financial system constituents as well as their interrelationships. For a sample of 61 countries, we find that diversity in financial "ecosystems" differs widely across countries and over time. Our evidence shows that diversity has a significant growth enhancing effect that is robust to other financial development controls. Diversity also reduces growth volatility and mitigates the negative effect of systemic banking crises on growth. The effect is both statically and economically significant across various construction methodologies for the financial diversity index. Our results suggest that financial policies that promote diversity within the financial system could be a powerful tool to promote sustainable growth while potentially improving resilience and stability.