Bank of England research on ring-fencing and bank funding structures

Ring-fencing came into effect at the start of 2019. The regulation requires large UK banking groups to separate their core retail banking services from their investment banking activities, in order to protect UK retail banking from shocks originating elsewhere. Unlike Glass-Steagall, ring-fencing allows banking groups to continue to run both retail and investment banks. To do so, however, these groups must house their retail deposit-taking business in a subsidiary (the ‘ring-fenced bank,’ or RFB) that is separate from the entity housing their investment banking operations (the ‘non-ring-fenced bank’, or NRFB) — as illustrated in Figure 1. As we show in the paper, this requirement implies a substantial change in the extent to which different assets across the group are funded by retail deposits. Relative to the funding mix before the reform, the retail funding share of assets that can be placed in the RFB (such as mortgages) increases by around 18 percentage points on average. Meanwhile, the retail funding share of assets housed in the NRFB (mainly wholesale and investment banking) decreases by around 45 percentage points on average.

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