ORIGINAL ARTICLE Do Basel Accords influence competition in the banking industry? A comparative analysis of Germany and the UK Leone Leonida 1,2 • Eleonora Muzzupappa 1 Ó Macmillan Publishers Ltd 2017 Abstract 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 tech- nology, able to escape the regulation that, in turn, prevents new entrants from entering into the field. Keywords Basel Accords Á Banking competition Á German banking system vs UK banking system Introduction We aim at comparing the impact of Basel I and Basel II (which will be referred to as Basel hereafter) on the degree of competition in the German and UK banking industries. 1,2 It is well known that the banking sector is heavily reg- ulated, especially in terms of capital requirements. Banks provide indeed an array of services and perform activities that involve individuals (e.g., depositors and consumers) and their wellbeing, and hence the interests underlying banking activities are public in nature. This is ultimately why the main concern of the regulator is to foster com- petition and stability in the banking system. 3 Basel pursues this aim with rules regarding both the optimal level of capital that banks have to hold (Pillar I), and the comple- mentary 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). 4,5 The 2007/09 financial crisis proved regulation to be somewhat inadequate. This is why, in the aftermath of the crisis, there is the quest for new financial regulation so as to avoid further crisis phenomena. What is believed is that, in & Leone Leonida leone.leonida@kcl.ac.uk 1 King’s Business School, King’s College London, 30 Aldwich, London WC2B 4BG, UK 2 SEAM, University of Messina, Piazza Pugliatti 1, Messina 98100, Italy 1 Basel I (1988), Basel II (2004), and Basel III (2010) represent the prudential banking regulation issued by the Basel Committee on Banking Supervision, with the aim of promoting worldwide super- vision and enhancing financial stability at a global level. To this purpose, capital requirements ensure that banks keep enough capital so that they are able to manage the risks they take in carrying out their activities [1]. 2 Basel Committee on Banking Supervision [2]. 3 Dow [3]. 4 Basel Committee on Banking Supervision [4]. 5 Basel Committee on Banking Supervision [5]. J Bank Regul DOI 10.1057/s41261-017-0053-0