Ring Fencing Volcker's Rule?

This chapter is aimed at highlighting why ring fencing not only presents a more feasible and cost effective option to other models, but also why its degree of flexibility provides the more appropriate balance in a financial environment whose trend is increasingly inclined towards conglomeration. Whilst the Liikanen Report highlights why there is need for re-structuring of banks into separate legal entities – as a means of achieving ring fencing activities, the mandatory separation of banks' proprietary trading and other risky activities, such as that opted for under the Liikanen Report could be distinguished from the position under Volcker's Rule in the sense that it does not impose such stringent requirements as those applicable under Volcker's Rule – whilst not being as flexible as ring fencing recommendations proposed in the Vickers Report.

“Volcker/Vickers Hybrid”?

Whilst some valid and justified arguments have been put forward in favor of ring fencing, that is, constructing a fire-wall between consumer and investment banks, and that such activities can be achieved without restructuring banks into separate legal entities, the Liikanen Report highlights why there is need for such re-structuring. As well as considering the merits of ring fencing and the establishment of separate legal activities and entities, this chapter aims to highlight why a suitable model aimed at mitigating risks of contagion can to a large extent, be justified on a cost-benefit analysis basis. Furthermore, the chapter ultimately concludes that even though a greater degree of separation of legal entities and activities persist with the model which is referred to as “total separation”, a certain degree of independence between bank activities would also be necessary under ring fencing if its purposes and objectives are to be fulfilled.