Ringfencing banking activities and competition effects

Since the crisis of 2007/2008 several ringfencing regulations have been implemented to shield the public from exposure due to high risk activities from banks. Among the U.S., U.K. and continental Europe dierent programs force bank to shield traditional banking activities such as loan- and deposit taking while not allowing banks to benet from diversication discounts. Besides the result of more resilient banks, the seperation of activities can create a level playing eld and increase competition. In this paper the relationship between specialization and the eect on competition is examined by using the Panzar and Rosse (1987) Hstatistic as a competition proxy both on bank- and country level. The eects within years and within banks and countries show a negative relation between specialization and competition in the period 2005-2015. Even specialization towards traditional loan based activities is negatively associated with the level of competition among banks. Regulations aimed at enhancing competition competition, should focus on reducing size and increasing cost eciency and absorbing capacity while allowing for diversication.