Working Paper: CEPR ID: DP17625
Authors: John Thanassoulis; Irem Erten; Ioana Neamtu
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: Ringfencing; Repo Markets; Risk Taking
JEL Codes: G12; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ringfencing (G33) | Risk perception of banking groups in the repo market (G21) |
| Ringfencing (G33) | Borrowing costs for RFBs (G21) |
| Risk perception of banking groups in the repo market (G21) | Borrowing costs for RFBs (G21) |
| Ringfencing (G33) | Risk appetite of RFBs (G21) |
| Risk appetite of RFBs (G21) | Higher rates charged for reverse repos (E43) |
| Ringfencing (G33) | Perceived lower risk of RFBs (D91) |