Article by Steven L. Schwarcz
From Volume 87, Number 1 (November, 2013)
“Ring-fencing” is often touted as a regulatory solution to problems in banking, finance, public utilities, and insurance. However, both the precise meaning of ring-fencing, as well as the nature of the problems that ring-fencing regulation purports to solve, are ill-defined. This Article examines the functions and conceptual foundations of ring-fencing. In a regulatory context, the term can best be understood as legally deconstructing a firm in order to more optimally reallocate and reduce risk. So utilized, ring-fencing can help to protect certain publicly beneficial activities performed by private-sector firms, as well as to mitigate systemic risk and the too-big-to-fail problem inherent in large financial institutions. If not structured carefully, however, ring-fencing can inadvertently undermine efficiency and externalize costs.
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