Do Basel Accords influence competition in the banking industry? A comparative analysis of Germany and the UK

TY - JOUR

T1 - Do Basel Accords influence competition in the banking industry? A comparative analysis of Germany and the UK

AU - Leonida, Leone

AU - Muzzupappa, Eleonora

PY - 2018/1

Y1 - 2018/1

N2 - This paper compares the impact of Basel Accords on the degree of competition in the German and UK banking industries. The banking sector is heavily regulated in terms of capital requirements, and the Basel Accords regard both the optimal level of capital that banks have to hold (Pillar I), and the complementary supervisory review of the banks’ compliance to the capital requirement rules (Pillar II), and the market discipline via disclosure, where the aim is enhancing banking transparency (Pillar III). We argue that if regulation raises the cost of entry into the banking industry and that of staying in the sector, there is no need for the existing banks to dissipate their profits in order to maintain the dominant position they eventually have. On the one hand, the regulation impacts profits in the short run by imposing higher capital requirements that are tighter for smaller banks; on the other hand regulation reduces the threat by potential entrants at no extra cost for the existing banks. The likely outcome of these incentives is that profit-oriented systems invest rents in new technology, able to escape the regulation that, in turn, prevents new entrants from entering into the field.

AB - This paper compares the impact of Basel Accords on the degree of competition in the German and UK banking industries. The banking sector is heavily regulated in terms of capital requirements, and the Basel Accords regard both the optimal level of capital that banks have to hold (Pillar I), and the complementary supervisory review of the banks’ compliance to the capital requirement rules (Pillar II), and the market discipline via disclosure, where the aim is enhancing banking transparency (Pillar III). We argue that if regulation raises the cost of entry into the banking industry and that of staying in the sector, there is no need for the existing banks to dissipate their profits in order to maintain the dominant position they eventually have. On the one hand, the regulation impacts profits in the short run by imposing higher capital requirements that are tighter for smaller banks; on the other hand regulation reduces the threat by potential entrants at no extra cost for the existing banks. The likely outcome of these incentives is that profit-oriented systems invest rents in new technology, able to escape the regulation that, in turn, prevents new entrants from entering into the field.

KW - Banking competition

KW - Basel Accords

KW - German banking system vs UK banking system

UR - http://www.scopus.com/inward/record.url?scp=85030320890&partnerID=8YFLogxK

U2 - 10.1057/s41261-017-0053-0

DO - 10.1057/s41261-017-0053-0

M3 - Article

AN - SCOPUS:85030320890

SN - 1745-6452

VL - 19

SP - 64

EP - 72

JO - Journal of Banking Regulation

JF - Journal of Banking Regulation

IS - 1

ER -