University of Southern California

Ring-Fencing and Its Alternatives

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Postscript (Response) by David Zaring
September, 2014

Steven Schwarcz’s “Ring-Fencing” gets much of its impact from its broad definition of the term, which is usually heard these days when thinking about whether a multinational bank ought to be forbidden from removing the assets of its branches in one country to support its activities in another.

One of the singular contributions of the article lies in its willingness to look beyond that use of the term to think about what ring-fencing means more broadly and conceptually. As Schwarcz observes, ring-fencing is nothing less than a way to allocate resources, regulate firms, and reassure stakeholders that could be applied any enterprise. The ring-fencing metaphor posits the separation of assets within a firm—some are inside the ring fence, and others are not. To Schwarcz this amounts to “legally deconstructing a firm in order to more optimally reallocate and reduce risk,” which could include any restructuring involving holding companies, off-balance sheet entities, and even the creation of corporate subsidiaries.

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