forthcoming in European Banking Regulation (CH Beck) , by H. Eidenmüller, M. Habersack, L. Klöhn (eds.)

To Ring-Fence or Not, and How? Strategic Questions for Post-Crisis Banking Reform in Europe

With the proposals of the United Kingdom’s Independent Commission on Banking (now enacted in legislation), the “ring-fencing” of core banking functions and their legal and commercial insulation against the risks emanating from investment banking has attracted wide-spread attention in both academic and regulatory circles world-wide. This concept is but one emanation of a broader move towards the segregation of commercial and investment banking, which is being accomplished in the United States under the so-called “Volcker Rule” (Dodd-Frank Act, § 619), in a number of Continental European jurisdictions under national legislation since 2012, and promoted within Europe by the recommendations of the Liikanen commission and a recent draft for an EU Regulation on structural measures improving the resilience of EU credit institutions. Moreover, the term has been used to describe older regulatory strategies employed by host-country authorities in cross-border settings, which involve the segregation of local branches and subsidiaries from a multinational banking, with a view to protecting domestic creditors against the fallout from the insolvency of foreign institutions both ex ante and ex post. Against this background, the present paper promotes an integrated, functional understanding of ring-fencing in the context of banking regulation and defines some core strategic questions for future structural reform of the European banking systems.