Ring-fencing Banks

Policy Study

The role of banks in the global financial crisis has generated significant public anger. The massive bailout using billions of public sector funds has been seen as something which must not be allowed to happen again. One area which has been the focus of serious criticism is what is seen as the reckless investment banking activity of many of the banks.  This has led to calls for the retail side of banking (in other words, the traditional deposit-taking and lending aspects) to be separated from the riskier activities of the investment banking side.

Since then, the banking part of the financial system has been strengthened as banks are now required to hold increased levels of capital and formal resolution mechanisms for failing banks and financial institutions have been introduced, bringing further improvements. The new EU bank resolution regime specifically seeks to overcome some of the difficulties that are associated with resolving failing institutions where they are based across more than one Member State.  At the same time, efforts are being made to harmonise depositor protection in the EU.  All this work is the result of a significant effort from the international financial community in an attempt to address the problem of banks which have been considered “too big to fail”. There is another proposed reform which has become known as ‘ring-fencing’ and which is the focus of this article.

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