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The ring-fencing bonus

Author

Listed:
  • Erten, Irem

    (Warwick Business School, University of Warwick)

  • Neamtu, Ioana

    (Bank of England)

  • Thanassoulis, John

    (Warwick Business School, University of Warwick, CEPR)

Abstract

We study the impact of ring-fencing on bank risk using short-term repo rates. Exploiting confidential data on the near-universe of sterling-denominated repo transactions, we find compelling evidence that banking groups subject to ring-fencing are perceived to be safer; repo investors lend to ring-fenced groups at lower rates, controlling for bank characteristics and collateral risk. Ring-fenced groups charge more to supply liquidity. We show that these effects are driven by the ring-fenced subsidiary; the other subsidiaries are not adversely impacted by ring-fencing to any meaningful extent. We further document that the banking groups reduce their risk-taking after the imposition of the fence. Our paper suggests that structural reforms can have a significant beneficial impact on risk in the banking system.

Suggested Citation

  • Erten, Irem & Neamtu, Ioana & Thanassoulis, John, 2023. "The ring-fencing bonus," Bank of England working papers 999, Bank of England.
    • Handle: RePEc:boe:boeewp:0999
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    More about this item

    Keywords

    Ring-fencing; repo markets; risk-taking;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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