The BOE has released a paper exploring the question of how ring fencing deposit taking from investment banking impacts the banking market. I have included the abstract of the paper below and you can find a summary of the paper here on the “Bank Underground” blog. I don’t see this as the final word on these questions but it does offer a perspective worth noting.
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.
Tony – From the Outside