The ring-fencing bonus

65 Pages Posted: 26 Oct 2022 Last revised: 18 Mar 2024

See all articles by Irem Erten

Irem Erten

University of Warwick - Warwick Business School

Ioana Neamțu

Bank of England

John E. Thanassoulis

University of Warwick - Warwick Business School; UK Competition and Markets Authority; Oxford-Man Institute, University of Oxford

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2024

Abstract

We study the impact of ring-fencing on risk-taking in the financial sector using short-term money markets. Ring-fencing is when the government restricts some activities to a subsidiary of the group whilst restricting intra-group transfers. Exploiting confidential data on sterling-denominated repo transactions, we document that banking groups subject to ring-fencing are perceived to be safer; repo investors lend to ring-fenced groups at lower rates. We show that ring-fenced groups reduce their risk-appetite and that the safety perception is amplified during times of market stress. Our paper suggests that structural reforms can create a ‘safe haven’ bank in the financial system.

Keywords: Ring-fencing, repo markets, risk-taking

JEL Classification: G12, G18, G21

Suggested Citation

Erten, Irem and Neamțu, Ioana and Thanassoulis, John E., The ring-fencing bonus (March 6, 2024). Bank of England Working Paper No. 999, WBS Finance Group Research Paper, Available at SSRN: https://ssrn.com/abstract=4256749 or http://dx.doi.org/10.2139/ssrn.4256749

Irem Erten

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Ioana Neamțu

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

John E. Thanassoulis (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://https://sites.google.com/site/thanassoulis/

UK Competition and Markets Authority ( email )

Victoria House
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United Kingdom

Oxford-Man Institute, University of Oxford ( email )

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Oxford, Oxfordshire OX2 6ED
United Kingdom

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