Separating retail and investment banking: evidence from the UK

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 27 November 2020

Staff Working Paper No. 892

By Matthieu Chavaz and David Elliott

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.

PDFSeparating retail and investment banking: evidence from the UK

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