In Two Minds: The Governance of Ring-Fenced Banks

Journal of Corporate Law Studies, Vol. 19, Issue 1, pp. 197-249 (2019)

59 Pages Posted: 1 Feb 2019 Last revised: 16 Feb 2019

See all articles by Thom Wetzer

Thom Wetzer

University of Oxford, Students ; University of Oxford - Oxford-Man Institute of Quantitative Finance, Students ; Institute for New Economic Thinking at the Oxford Martin School

Date Written: 2018

Abstract

A keynote policy in the United Kingdom since the financial crisis has been to ‘ring-fence’ retail banks into separate subsidiaries, so-called ‘ring-fenced bodies’ (‘RFBs’). To protect vital retail banking services from risk elsewhere in the banking group, the ring-fencing framework deploys a range of regulatory tools to credibly insulate the RFB. However, directors of the RFB’s parent company have an interest in undermining the ring-fence, and directors of RFBs have the discretion to do so. UK policymakers therefore acknowledge that the RFB’s directors must be able to take decisions ‘independently’ of the parent company. This article argues that, because UK corporate law generates accountability to the parent company, RFB directors remain accountable to parent company directors from whom they are supposed to be independent. The interplay between incomplete and indeterminate regulatory obligations and the incentives generated by ring-fence governance together compromise the credibility of the ring-fencing regime.

Keywords: ring-fencing, ring-fenced bank, structural regulation, banking, financial regulation, corporate governance, directors’ duties, director liability, independent directors, shareholder primacy, financial crises, systemic risk

JEL Classification: G21, G28, G34, G38, K20, K22

Suggested Citation

Wetzer, Thom, In Two Minds: The Governance of Ring-Fenced Banks (2018). Journal of Corporate Law Studies, Vol. 19, Issue 1, pp. 197-249 (2019). Available at SSRN: https://ssrn.com/abstract=3325292

Thom Wetzer (Contact Author)

University of Oxford, Students ( email )

Oxford
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance, Students ( email )

Oxford
United Kingdom

Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

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