ring fencing


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Ring Fencing

The practice of a company creating a legal entity separate from itself in order to protect certain assets. For example, ring fencing may protect assets from taxation, regulation, or allow the company to hide it from creditors. Ring fencing often makes use of offshore accounting. It is usually legal, but there are limitations, such as maximum amounts that may be protected.

ring fencing

The legal walling off of certain assets or liabilities within a corporation. For example, a firm may form a new subsidiary to protect, or ring-fence, specific assets from creditors.
Case Study California's electricity deregulation of the late 1990s resulted in the state's electric utilities hitting the financial wall by 2001. Unable by law to raise the rates it charged its customers, the utilities lost billions of dollars buying electricity at rising wholesale prices during an energy shortage in the western United States. To protect one part of the company, publicly traded PG&E, parent of Pacific Gas & Electric, in January 2001 ring-fenced its National Energy Group, which was then able to obtain its own credit rating and borrow money when the remainder of the company was shut out of the financial markets. In April 2001 Pacific Gas & Electric filed for bankruptcy while protected National Energy Group continued to borrow funds for trading power and purchasing turbines. The ring-fencing protected National Energy Group from Pacific Gas & Electric's creditors, which, in turn, allowed the company access to the capital markets. Critics claimed the financial maneuver was an abuse that unfairly shielded assets from creditors.
References in periodicals archive ?
Barclays Plc (LSE: BARC) appears to be considering ways to circumvent ring fencing rules.
We have provided clarity for affected banks on how we will implement ring fencing and this will enable firms to take substantial steps forward in their preparations for structural reform.
While ring fencing rules have been proposed to protect savers and taxpayers from any future crises in the financial sector, banks feel the costs involved are too high.
There were fears about diluting the provisions of ring fencing after the finance minister decided last week not to renew the contract of the chief executive of the country's Financial Conduct Authority, Martin Wheatley.
A former head of the Bank of England has suggested that the Australian banking system could benefit from adopting certain ring fencing exercises similar to banks in the UK.
The upper house of parliament in Germany, the Bundesrat, has cleared the legislation on ring fencing of banks in the country.
Global Banking News-February 12, 2013--European Banking Federation says ring fencing would lead to problems(C)2013 ENPublishing - http://www.
According to a group of MPs who released the report, government rules on ring fencing bank activities 'fall short' and need to be boosted to ensure that they are able to police the banking industry effectively.
The banking standards committee has suggested a full break up of high street banks from investment banks in an 'electrified' ring fencing action, according to The Guardian.
The head of banking supervision in the Financial Services Authority, Andrew Bailey, has said that banks that fail to comply with ring fencing of retail and investment operations should be threatened with forcible separation.
Global Banking News-November 15, 2012--Senior banker in UK says that ring fencing could create moral hazards(C)2012 ENPublishing - http://www.
John Vickers headed the Independent Commission on Banking (ICB), which recommended ring fencing of banks in the UK.