The ring-fencing bonus

We study the impact of ring-fencing on bank riskiness using short-term money markets. Ring-fencing is when the government restricts some banking 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—and that the safety perception is amplified during times of market stress. We show that ring-fenced groups also intermediate more cautiously. Our paper suggests that structural reforms can create a ‘safe-haven’ bank in the financial system.