Basel Study Offers Cautionary Note on Ring-Fencing Proposals
In this report, FedFin assesses a recent BIS working paper that examines the impact from a systemic-risk and business-model perspective of separating investment from commercial banking. This ring-fencing concept has of course gained considerable currency in global circles following enactment of the Volcker rule, the U.K. Vickers standards and the EU Liikanen report (see Client Report REFORM93). FDIC Vice Chairman Hoenig, among others, is also proposing new activity restrictions, while the Brown-Vitter bill (see forthcoming FedFin report) would impose tighter inter-affiliate restrictions to, in effect, ring-fence traditional banking from other holding-company activities. This Basel paper, a working one from BIS staff, does not provide specific policy recommendations, but it does argue that proposed structural reforms may create banking models that are costlier, less global, and more difficult to supervise. As such, it raises cautionary considerations that have to date led the Basel Committee to eschew ring-fencing and could affect U.S. deliberations on this critical question.
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