The ring-fencing bonus

Irem Erten (), Ioana Neamtu () and John Thanassoulis
Additional contact information
Irem Erten: Warwick Business School, University of Warwick
Ioana Neamtu: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 999, Bank of England working papers from Bank of England

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 (search for similar items in EconPapers)
JEL-codes: G12 G18 G21 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2023-01-23
New Economics Papers: this item is included in nep-ban and nep-rmg
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Working Paper: The Ring-Fencing Bonus (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0999

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