Ring-Fencing, Lending Competition, and Taxpayer Exposure

30 Pages Posted: 25 Nov 2016 Last revised: 2 Sep 2017

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Rune Stenbacka

Hanken School of Economics

Date Written: September 1, 2017

Abstract

We evaluate the effects of ring-fencing on lending market competition, and thereby on banks' risk-taking as well as taxpayers' risk exposure. We show analytically that strong ring-fencing intensifies lending market competition, reduces bank profits, and increases borrower and consumer surplus compared with weak or no ring-fencing. We find no theoretical support for weak ring-fencing as a successful instrument to induce financial stability. Nevertheless weak ring-fencing induces lower expected bailout costs than strong and no ring-fencing if the probability of a banking crisis is lower than the fraction of total deposits that banks allocate outside of bailout protection under weak ring-fencing.

Keywords: Ring-fencing, separation of retail banking and investment banking, financial crises, bailout of banks, lending market competition

JEL Classification: G21, G28

Suggested Citation

Shy, Oz and Stenbacka, Rune, Ring-Fencing, Lending Competition, and Taxpayer Exposure (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=2874316 or http://dx.doi.org/10.2139/ssrn.2874316

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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