The Ring-Fencing Bonus

Posted: 24 Jan 2023

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: October 21, 2022

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.

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 (October 21, 2022). Bank of England Working Paper No. 999, Available at SSRN: https://ssrn.com/abstract=4335577

Irem Erten

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Ioana Neamțu (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

John E. Thanassoulis

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 )

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Oxford-Man Institute, University of Oxford ( email )

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