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The Ring-Fencing Bonus

Author

Listed:
  • Thanassoulis, John
  • Erten, Irem
  • Neamtu, Ioana

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

  • Thanassoulis, John & Erten, Irem & Neamtu, Ioana, 2022. "The Ring-Fencing Bonus," CEPR Discussion Papers 17625, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17625
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    More about this item

    Keywords

    Ring-fencing;

    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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