Separating Retail and Investment Banking: Evidence from the UK

75 Pages Posted: 8 Dec 2020 Last revised: 2 Mar 2021

Date Written: November 27, 2020

Abstract

The idea of separating retail and investment banking remains controversial. Exploiting the introduction of UK ring-fencing requirements in 2019, we document novel implications of such separation for credit and liquidity supply, competition, and risk-taking via a funding structure channel. By preventing conglomerates from using retail deposits to fund investment banking activities, this separation leads conglomerates to rebalance their activities towards domestic mortgage lending and away from supplying credit lines and underwriting services to large corporates. By redirecting the benefits of deposit funding towards the retail market, this rebalancing reduces the cost of credit for households, without eroding lending standards. However the rebalancing also increases mortgage market concentration and risk-taking by smaller banks via indirect competition effects.

Keywords: Bank regulation, Universal banking, Glass-Steagall, Mortgages, Syndicated lending, Competition

JEL Classification: G21, G24, G28

Suggested Citation

Chavaz, Matthieu and Elliott, David, Separating Retail and Investment Banking: Evidence from the UK (November 27, 2020). Bank of England Working Paper No. 892, Available at SSRN: https://ssrn.com/abstract=3744276 or http://dx.doi.org/10.2139/ssrn.3744276

Matthieu Chavaz (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

David Elliott

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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