Ringfencing vs: Bailouts: Ensuring Stability in Times of Crisis

1. What are ringfencing and bailouts, and why are they important for financial stability?

Ringfencing and bailouts are two different approaches to deal with the problem of financial instability and systemic risk in the banking sector. Financial instability occurs when banks face difficulties in meeting their obligations to depositors, creditors, or other counterparties, or when they suffer losses that threaten their solvency. systemic risk is the risk that the failure of one or a few banks can trigger a chain reaction of failures or distress in other banks or financial institutions, leading to a collapse of the entire financial system. Both ringfencing and bailouts aim to prevent or mitigate the negative consequences of financial instability and systemic risk for the economy and society.

Ringfencing is a regulatory measure that requires banks to separate their core retail banking activities, such as taking deposits and making loans to individuals and small businesses, from their riskier wholesale and investment banking activities, such as trading securities, derivatives, and commodities. The idea is to create a "ring-fence" around the retail banking operations, so that they are protected from the shocks and losses that may affect the rest of the bank. Ringfencing also makes it easier for regulators and resolution authorities to intervene and resolve a failing bank without disrupting the provision of essential banking services to the public.

Bailouts are a form of government intervention that involves providing financial assistance to banks or other financial institutions that are in distress or at risk of failure. The financial assistance may take the form of loans, guarantees, capital injections, or asset purchases. The rationale for bailouts is to prevent the failure of systemically important banks or financial institutions that are considered "too big to fail" or "too interconnected to fail", meaning that their collapse would have severe repercussions for the financial system and the real economy. Bailouts also aim to restore confidence and stability in the financial markets and prevent contagion effects.

Both ringfencing and bailouts have advantages and disadvantages for financial stability. Some of the main points of comparison are:

1. Effectiveness: Ringfencing is intended to reduce the probability and impact of bank failures by isolating the retail banking activities from the shocks and losses in other parts of the bank. However, ringfencing may not be sufficient to prevent bank failures if the retail banking activities themselves are exposed to significant risks, such as credit risk, liquidity risk, or operational risk. Moreover, ringfencing may not eliminate the interconnections and spillovers between different banks or financial institutions, especially in times of stress. Bailouts, on the other hand, are designed to prevent or resolve bank failures by providing liquidity and solvency support to distressed banks or financial institutions. However, bailouts may not be effective if they are delayed, insufficient, or poorly designed. Furthermore, bailouts may create moral hazard problems by encouraging excessive risk-taking and reducing market discipline.

2. Cost: Ringfencing imposes costs on both banks and regulators. For banks, ringfencing may increase their operational costs, reduce their economies of scale and scope, limit their diversification benefits, and constrain their access to funding sources. For regulators, ringfencing may increase their supervisory costs, complexity, and challenges. Bailouts also entail costs for both taxpayers and governments. For taxpayers, bailouts may involve direct fiscal costs if the government has to use public funds to rescue banks or financial institutions. For governments, bailouts may increase their public debt and deficit levels, affect their credit ratings, and limit their fiscal space for other spending priorities.

3. Distribution: Ringfencing affects the distribution of risks and returns between different stakeholders of banks. By protecting the retail banking activities from the losses in other parts of the bank, ringfencing benefits the depositors, creditors, and customers of retail banking services. However, ringfencing also reduces the returns for the shareholders and investors of wholesale and investment banking activities. Bailouts also have distributional implications for different stakeholders of banks. By providing financial assistance to distressed banks or financial institutions, bailouts benefit the shareholders, creditors, managers, and employees of those entities. However, bailouts also impose costs on taxpayers who have to bear the fiscal burden of rescuing banks or financial institutions.

Ringfencing and bailouts are two different approaches to ensure stability in times of crisis. Both have pros and cons for financial stability. The optimal choice between them depends on various factors such as the nature and severity of the crisis, the structure and characteristics of the banking sector, the availability and effectiveness of other policy tools, and the preferences and objectives of policymakers.

2. How does it work, and what are its benefits and challenges?

In the complex landscape of financial stability, ringfencing emerges as a crucial strategy, one that has been increasingly debated and implemented in the wake of economic crises. The concept of ringfencing, essentially, refers to the practice of separating certain assets or business operations within a financial institution to protect them from risks that might arise in other parts of the organization. This method is often employed as a preventative measure to ensure that a crisis in one sector does not lead to a domino effect, jeopardizing the entire institution or, in some cases, the broader economy.

Ringfencing operates on the principle of containment and aims to create a safeguarded environment within a financial entity, insulating vital functions from potential contagion. This method has its roots in the aftermath of the 2007-2008 global financial crisis, where governments worldwide were compelled to intervene to prevent the collapse of major banks. In the ensuing discussions about financial regulations and safeguards, the idea of ringfencing gained prominence, heralded as a proactive measure to avert future crises and minimize the impact of any financial meltdown.

### How Does Ringfencing Work?

1. Isolating Risky Assets: One of the primary mechanisms of ringfencing involves identifying high-risk assets or operations within a financial institution. These could be speculative trading activities, complex derivatives, or any other elements deemed precarious. By isolating these assets, the institution aims to protect its core functions from the potential losses incurred in these high-risk ventures.

2. Creating Separate Subsidiaries: Financial institutions often establish separate subsidiaries for certain high-risk activities. These subsidiaries operate independently, with their own capital and risk management structures. By doing so, the parent company shields itself from the liabilities of these subsidiaries, ensuring that losses in one area do not impact the overall financial health of the institution.

3. Stricter Regulatory Oversight: Regulators play a vital role in the implementation of ringfencing. They enforce stringent regulations, ensuring that the separated entities adhere to specific guidelines and maintain adequate capital buffers. This oversight is essential in preventing regulatory arbitrage, where institutions exploit regulatory differences across jurisdictions to their advantage.

### Benefits of Ringfencing:

1. Reduced Systemic Risk: Ringfencing mitigates the risk of a localized crisis escalating into a systemic one. By isolating vulnerable segments, the overall financial system becomes more resilient, reducing the likelihood of a catastrophic collapse.

2. Enhanced Stability and Confidence: Investors and the public gain confidence when they perceive that critical functions of financial institutions are ringfenced. This assurance can prevent mass panic during times of economic uncertainty, maintaining stability in the market.

3. improved Risk management: Implementing ringfencing necessitates a comprehensive assessment of risks within a financial institution. This process often leads to improved risk management practices, making the institution more robust and capable of withstanding unexpected shocks.

### Challenges and Criticisms:

1. Complexity and Implementation Challenges: Establishing effective ringfencing mechanisms is a complex task. Financial institutions, especially large and diversified ones, face challenges in identifying high-risk activities and creating appropriate boundaries without disrupting their operations.

2. Regulatory Arbitrage: Despite regulatory oversight, there is a risk of regulatory arbitrage, where institutions exploit regulatory gaps or differences between jurisdictions. This can undermine the effectiveness of ringfencing measures, allowing risks to seep through unnoticed.

3. costs and Resource allocation: Ringfencing requires significant investments in terms of technology, personnel, and infrastructure. Smaller institutions might struggle to bear these costs, potentially leading to an uneven playing field in the financial sector.

4. Inadequate Risk Assessment: If the initial risk assessment is flawed or does not encompass all potential risks, the ringfencing strategy could create a false sense of security. In such cases, the institution remains vulnerable to unforeseen challenges, defeating the purpose of the protective measure.

In the ongoing discourse surrounding financial stability, the effectiveness of ringfencing remains a topic of intense scrutiny and debate. While it undeniably offers a structured approach to containing risks, its implementation and long-term efficacy depend on meticulous planning, robust regulatory frameworks, and continuous adaptation to the evolving landscape of global finance. As economies continue to navigate the complexities of the modern financial world, the balance between innovation, regulation, and stability remains a paramount concern, making ringfencing a key instrument in this delicate equilibrium.

3. How do they work, and what are their benefits and challenges?

Bailouts are a form of financial assistance that governments or other entities provide to failing or distressed businesses, industries, or countries. The main purpose of bailouts is to prevent the collapse of these entities and the negative consequences that may follow, such as job losses, economic instability, and loss of investor confidence. However, bailouts also have some drawbacks and challenges, such as creating moral hazard, imposing a burden on taxpayers, and distorting market incentives. In this section, we will explore how bailouts work and what are their benefits and challenges from different perspectives.

How do bailouts work?

Bailouts can take different forms depending on the situation and the entity that needs assistance. Some of the common forms of bailouts are:

1. Loans: The government or another entity can lend money to the troubled entity at a low or zero interest rate, with or without collateral, and with flexible repayment terms. The loan can help the entity to meet its short-term liquidity needs and avoid defaulting on its obligations. For example, in 2008, the U.S. Government lent $85 billion to american International group (AIG), an insurance company that faced a liquidity crisis due to its exposure to credit default swaps.

2. Equity: The government or another entity can buy shares or stakes in the troubled entity, either directly or through a special purpose vehicle. The equity injection can provide capital to the entity and allow it to continue its operations. The government or another entity can also have some control or influence over the management and decisions of the entity. For example, in 2008, the U.S. Government acquired a 79.9% stake in AIG in exchange for its loan.

3. Guarantees: The government or another entity can guarantee some or all of the liabilities or obligations of the troubled entity, such as its deposits, debts, or contracts. The guarantee can reduce the risk of default and improve the creditworthiness of the entity. The government or another entity can charge a fee for providing the guarantee or impose some conditions on the entity. For example, in 2008, the U.S. Government guaranteed up to $306 billion of Citigroup's assets in exchange for preferred shares and warrants.

4. Asset purchases: The government or another entity can buy some or all of the assets of the troubled entity, especially those that are illiquid, toxic, or impaired. The asset purchase can help the entity to reduce its losses, improve its balance sheet, and free up capital for lending or investment. The government or another entity can hold the assets until they recover their value or sell them at a profit or loss. For example, in 2008, the U.S. Government created the troubled Asset Relief program (TARP) to purchase up to $700 billion of distressed assets from banks and other financial institutions.

What are the benefits of bailouts?

Bailouts can have some positive effects on the economy and society, such as:

- Saving jobs and businesses: Bailouts can prevent mass layoffs and bankruptcies that can affect millions of workers, consumers, suppliers, and investors. By preserving jobs and businesses, bailouts can also maintain income levels, consumer spending, tax revenues, and social welfare programs.

- Preventing systemic risk: Bailouts can prevent the failure of one entity from spreading to other entities and sectors through contagion effects. By avoiding systemic risk, bailouts can also protect the stability and functioning of the financial system and markets.

- Restoring confidence: Bailouts can restore confidence among investors, creditors, depositors, and customers by signaling that the government or another entity is willing and able to support the troubled entity. By restoring confidence, bailouts can also reduce panic and uncertainty that can exacerbate financial crises.

- Stimulating growth: Bailouts can stimulate economic growth by providing liquidity and capital to entities that can resume lending or investment activities. By stimulating growth, bailouts can also reduce deflationary pressures and increase aggregate demand.

What are the challenges of bailouts?

Bailouts can also have some negative effects on the economy and society, such as:

- Creating moral hazard: Bailouts can create moral hazard by encouraging entities to take excessive risks in anticipation of being rescued if things go wrong. By creating moral hazard, bailouts can also undermine market discipline and accountability that are essential for efficient allocation of resources.

- Imposing a burden on taxpayers: Bailouts can impose a burden on taxpayers by using public funds to support private entities that may not repay their debts or generate returns for their shareholders. By imposing a burden on taxpayers, bailouts can also increase public debt and fiscal deficits that may limit future spending options.

- Distorting market incentives: Bailouts can distort market incentives by favoring some entities over others based on political or social considerations rather than economic merit. By distorting market incentives, bailouts can also create unfair competition and inefficiencies that may hamper innovation and productivity.

Conclusion

Bailouts are a controversial policy tool that governments or other entities use to rescue failing or distressed businesses, industries, or countries. Bailouts can have both benefits and challenges, depending on the circumstances and the outcomes. Therefore, bailouts should be carefully designed and implemented to achieve their objectives while minimizing their costs and risks.

4. What are the trade-offs and synergies between the two approaches?

One of the most debated topics in the aftermath of the global financial crisis is how to ensure the stability of the banking system and prevent future bailouts that burden taxpayers and distort market discipline. Two main approaches have emerged in the regulatory landscape: ringfencing and bail-ins. Ringfencing involves separating the retail activities of banks from their riskier investment banking operations, either by creating distinct legal entities or by imposing restrictions on capital and liquidity transfers. Bail-ins, on the other hand, involve imposing losses on the creditors of a failing bank, rather than relying on public funds to rescue it. Both approaches aim to protect depositors and taxpayers, reduce moral hazard, and enhance resolvability. However, they also entail trade-offs and synergies that need to be carefully assessed. In this section, we will compare ringfencing and bailouts from different perspectives, such as efficiency, stability, competition, and coordination. We will use a numbered list to highlight some of the main points:

1. Efficiency: Ringfencing may reduce the efficiency of banks by preventing them from diversifying their activities and exploiting economies of scale and scope. It may also increase their funding costs and reduce their profitability. Bail-ins may enhance efficiency by aligning the incentives of creditors and shareholders, and by reducing the implicit subsidy that banks enjoy from being too-big-to-fail. However, bail-ins may also increase the funding costs of banks, especially for unsecured debt holders who face higher risk of losses.

2. Stability: Ringfencing may enhance stability by insulating retail deposits from investment banking losses, and by reducing the complexity and interconnectedness of banks. It may also facilitate resolution by creating clear boundaries between different parts of a bank. Bail-ins may also enhance stability by providing a credible mechanism to absorb losses and recapitalize banks without disrupting their critical functions. However, bail-ins may also pose stability risks if they trigger contagion or panic among creditors or depositors.

3. Competition: Ringfencing may increase competition by creating a level playing field between different types of banks, and by reducing the market power of large universal banks. It may also encourage entry and innovation by new players who can offer specialized services. Bail-ins may also increase competition by eliminating the competitive advantage of too-big-to-fail banks, and by allowing market forces to discipline inefficient or risky banks. However, bail-ins may also reduce competition if they lead to consolidation or concentration in the banking sector.

4. Coordination: Ringfencing may reduce coordination by creating fragmentation and divergence among national regulators who may impose different or conflicting requirements on banks. It may also undermine cross-border cooperation and burden-sharing in case of a crisis. Bail-ins may improve coordination by creating a common framework and authority for resolving failing banks across jurisdictions. However, bail-ins may also face coordination challenges if there are disagreements or conflicts among different stakeholders or regulators over the allocation of losses or the valuation of assets.

As we can see, ringfencing and bailouts are not mutually exclusive or incompatible approaches. They can complement each other in achieving the objectives of financial stability and consumer protection. However, they also have potential drawbacks and limitations that need to be carefully weighed and balanced. The optimal design and implementation of these approaches depend on various factors, such as the structure and size of the banking sector, the degree of integration and harmonization among regulators, and the availability and effectiveness of other regulatory tools.

5. How have different countries implemented ringfencing and bailouts in response to past crises?

One of the most debated topics in the field of finance is how to ensure the stability of the financial system in times of crisis. Two of the most common approaches are ringfencing and bailouts, which have different advantages and disadvantages. Ringfencing is the practice of separating a portion of assets or operations from the rest of the entity, usually to protect them from losses or risks. Bailouts are the provision of financial assistance to a failing entity, usually by the government or a central bank, to prevent its collapse or insolvency. In this section, we will examine some case studies of how different countries have implemented ringfencing and bailouts in response to past crises, and what were the outcomes and implications of their choices.

Some examples of ringfencing and bailouts are:

1. The British ring-fencing law of 2019 : This law was enacted as a result of the 2008 global financial crisis, which exposed the vulnerability of consumers and their savings to the collapse of major banking institutions. The law required financial institutions to separate their retail banking activities from their investment banking activities, creating distinct entities with their own boards and capital requirements. The aim was to protect retail customers from potential losses in the investment banking sector, and to reduce the need for government bailouts in the future. The law also imposed restrictions on the transfer of funds and assets between the ring-fenced and non-ring-fenced entities, as well as on the dividends paid by the ring-fenced entities. The law affected some of the largest banks in the UK, such as Barclays, HSBC, Lloyds, RBS, and Santander.

2. The US Troubled asset Relief program (TARP) of 2008 : This program was established by the US Congress in response to the 2008 global financial crisis, which threatened the stability of the US banking system and economy. The program authorized the US Treasury to purchase or insure up to $700 billion of troubled assets from banks and other financial institutions, such as mortgage-backed securities and collateralized debt obligations. The aim was to restore liquidity and confidence in the financial markets, and to prevent a systemic failure of the banking system. The program also provided capital injections to banks and other firms, such as AIG, General Motors, and Chrysler, in exchange for preferred stock or warrants. The program was controversial, as it was seen by some as a bailout for Wall Street at the expense of Main Street.

3. The greek debt crisis and bailouts of 2010-2018 : This crisis was triggered by the revelation that Greece had falsified its fiscal data and had accumulated a large public debt that exceeded its GDP. The crisis sparked a loss of confidence in Greece's ability to repay its debt, leading to a rise in its borrowing costs and a risk of default. To avoid a collapse of the Greek economy and a contagion effect on other eurozone countries, Greece received three bailout packages from its European partners and the international Monetary fund (IMF), totaling €289 billion. The bailouts were conditional on Greece implementing harsh austerity measures and structural reforms, such as cutting public spending, raising taxes, privatizing state-owned assets, and liberalizing labor markets. The bailouts were unpopular among both Greeks and other Europeans, as they imposed severe social costs and failed to restore growth and competitiveness.

6. What are the best practices and pitfalls of ringfencing and bailouts based on empirical evidence?

One of the most debated topics in the aftermath of the global financial crisis is how to deal with failing banks and prevent systemic contagion. Two main approaches have emerged in the regulatory literature and practice: ringfencing and bailouts. Ringfencing refers to the separation of a bank's core activities from its non-core or risky activities, such as investment banking, proprietary trading, or cross-border lending. Bailouts refer to the provision of public funds or guarantees to rescue a bank from insolvency or illiquidity. Both approaches have advantages and disadvantages, and their effectiveness depends on various factors, such as the size and complexity of the bank, the nature and extent of the crisis, and the political and institutional environment. In this section, we will review some of the empirical evidence on ringfencing and bailouts, and draw some lessons learned on the best practices and pitfalls of these regulatory interventions.

Some of the main insights from the empirical literature are:

1. Ringfencing can reduce the probability and severity of bank failures, but it can also create unintended consequences. For example, ringfencing can reduce the diversification benefits and economies of scale of banking activities, increase the cost of funding and capital for banks, and create regulatory arbitrage opportunities. Moreover, ringfencing can have negative spillover effects on other jurisdictions, such as reducing cross-border lending and financial integration. Therefore, ringfencing should be carefully designed and coordinated across countries to avoid excessive fragmentation and inefficiency in the banking system.

2. Bailouts can prevent systemic collapse and restore market confidence, but they can also create moral hazard and fiscal costs. For example, bailouts can induce banks to take excessive risks in anticipation of being rescued by the government, which can increase the likelihood and magnitude of future crises. Moreover, bailouts can impose a heavy burden on taxpayers and public finances, especially when they are large and frequent. Therefore, bailouts should be used sparingly and selectively, with clear criteria and conditions for eligibility and repayment.

3. The optimal mix of ringfencing and bailouts depends on the trade-off between financial stability and efficiency. There is no one-size-fits-all solution for regulating banks in times of crisis, as different situations may require different responses. However, some general principles can be derived from the empirical evidence. First, ringfencing should be applied ex ante, before a crisis occurs, to reduce the need for bailouts ex post. Second, bailouts should be applied only when there is a clear threat to systemic stability, and when the benefits outweigh the costs. Third, both ringfencing and bailouts should be accompanied by other regulatory measures, such as capital requirements, resolution frameworks, deposit insurance schemes, and macroprudential policies .

4. The effectiveness of ringfencing and bailouts depends on the credibility and consistency of the regulators. One of the main challenges in implementing ringfencing and bailouts is to ensure that they are credible and consistent over time. For example, ringfencing can lose its credibility if regulators allow exceptions or loopholes for some banks or activities. Similarly, bailouts can lose their credibility if regulators fail to enforce strict conditions or impose losses on shareholders and creditors. Therefore, regulators should communicate clearly their objectives and strategies for ringfencing and bailouts, and follow through with their commitments .

7. What are the main takeaways and recommendations from the blog?

In this comprehensive exploration of the pivotal debate between ringfencing and bailouts as strategies for ensuring stability in times of crisis, we have examined a multitude of facets that underpin these mechanisms. The central question revolves around how to protect the economy and maintain financial stability when confronted with severe economic disruptions. We've delved into the rationale behind both approaches, the historical context that has shaped them, and the implications each has on the broader economic landscape. As we conclude this discussion, it is crucial to distill the main takeaways and offer recommendations for policymakers, financial institutions, and the public at large.

1. Diverse Approaches in Crisis Management: It is evident that there is no one-size-fits-all solution to managing crises. Different circumstances may necessitate different strategies. The key takeaway is that a balanced approach that incorporates elements of both ringfencing and bailouts can be more effective. The choice between these strategies should be context-dependent, considering factors such as the nature of the crisis and the robustness of the financial sector.

2. Preventative Measures: One recurring theme is the importance of preventive measures. Instead of waiting for crises to occur, proactive regulation and oversight can help mitigate the severity of financial shocks. Examples like the basel III framework, which increased capital requirements for banks, and stress testing have shown that these measures can go a long way in enhancing financial stability.

3. moral hazard: The moral hazard concern, where bailouts might encourage reckless behavior, needs to be carefully managed. Recommendations include attaching stringent conditions to bailouts, such as requirements for regulatory compliance, reform, or even clawback provisions if risks materialize. It's crucial to ensure that institutions that receive bailouts do not gain a free pass to engage in risky activities.

4. Transparency and Accountability: The role of transparency and accountability in both ringfencing and bailout scenarios cannot be overstated. Regulators and institutions should be transparent about their actions, decisions, and the allocation of funds. Establishing clear lines of accountability ensures that those responsible for failures are held answerable and that the public has faith in the financial system.

5. Public Perception and Trust: Public trust in the financial system is vital. The choice between ringfencing and bailouts can significantly impact how the public perceives the financial sector. Policymakers and financial institutions must take this into account and communicate their actions effectively to maintain trust in the system.

6. International Coordination: Financial crises are increasingly global in nature. Coordinated international efforts are essential to prevent contagion and ensure the effectiveness of responses. International organizations like the IMF, BIS, and FSB play a crucial role in facilitating this coordination.

7. Adaptability and Continuous Evaluation: The financial landscape is dynamic, and strategies must adapt to changing circumstances. Policymakers should continually assess the effectiveness of ringfencing and bailout mechanisms and be willing to modify them as needed.

8. Sectoral Differences: The appropriate strategy may vary across different sectors of the financial industry. For instance, the banking sector may require a different approach than the insurance or asset management sectors. It is essential to tailor strategies to the specific vulnerabilities and systemic importance of each sector.

9. Complementary Solutions: Ultimately, it is not about choosing one strategy over the other but rather about employing them in conjunction. Bailouts should be a last resort, used when ringfencing measures fall short, and vice versa. Combining these strategies can create a more resilient and flexible financial system.

The choice between ringfencing and bailouts is not a matter of picking sides, but rather a nuanced decision that should be based on a holistic assessment of the circumstances and risks at hand. The key is to strike a balance that maximizes financial stability while minimizing moral hazard. The lessons from past crises and the insights gleaned from different viewpoints provide a valuable roadmap for policymakers, financial institutions, and regulators to navigate the complex and ever-changing landscape of financial stability. The key is flexibility, adaptability, and a commitment to safeguarding the long-term health of the global economy.

8. Where can readers find more information and sources on ringfencing and bailouts?

Ringfencing and bailouts are two different approaches to deal with the problem of bank failures and systemic risk. Ringfencing aims to isolate the essential retail banking activities from the riskier investment banking operations, while bailouts involve using public funds to rescue insolvent banks. Both methods have advantages and disadvantages, and their effectiveness depends on various factors, such as the size and complexity of the banks, the degree of coordination among regulators, and the availability of alternative sources of funding. In this section, we will provide some references where readers can find more information and sources on ringfencing and bailouts, as well as some insights from different perspectives.

Some of the references are:

1. Basel III, Resolution, Bail-in, Bailout, Ring-fencing, and Banking Union: What Does the Future Hold for Banks and Their Investors?. This article by Graziella Marras from the CFA Institute Market Integrity Insights provides an overview of the main regulatory reforms that affect banks and their investors in the post-crisis era. It discusses the implications of Basel iii, resolution frameworks, bail-in bonds, ring-fencing, and banking union for bank solvency, profitability, and funding costs. It also highlights some of the challenges and uncertainties that remain in the implementation and harmonization of these reforms across jurisdictions.

2. Understanding ‘ring-fencing’ and how it could make banking riskier. This article by Wilson Ervin from the Brookings Institution argues that ring-fencing may not be an effective way to reduce systemic risk and protect taxpayers from bank failures. It claims that ring-fencing can create perverse incentives for banks to take more risks, reduce diversification benefits, increase funding costs, and undermine cross-border cooperation among regulators. It also suggests some alternative solutions, such as enhancing resolution regimes, increasing bail-in capital, and improving supervision and governance.

3. Banks set for clash with UK regulator over ringfencing rules. This article by Nicholas Megaw and Stephen Morris from the Financial Times reports on the recent developments and controversies regarding the ringfencing rules in the UK. It explains how ringfencing works in practice and what are the main challenges and costs for banks to comply with it. It also describes how some banks are trying to challenge or circumvent the rules by seeking exemptions or exploiting loopholes.

4. Ringfencing: What it is, How it Works, Examples. This article by James Chen from Investopedia provides a definition and explanation of ringfencing in general terms. It illustrates how ringfencing can be used to protect certain assets or profits from creditors, regulators, or taxes. It also gives some examples of ringfencing in different contexts, such as utilities, pensions, mortgages, and offshore accounts.

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