Staff Working Paper No. 999
By Irem Erten, Ioana Neamţu and John Thanassoulis
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 while restricting intragroup 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.
This version was updated in March 2024.
The ring-fencing bonus