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 ?
Recently, John McFarlane, bank chairman, is believed to have told top staff that the bank needed a way to protect the credit rating of its oversized investment bank because of ring fencing rules.
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.
According to the commission, the ongoing legislation appeared to be leading to a watered down version of Vickers' ring fencing measure.
He added that banks had a tendency to find innovative methods to avoid meeting regulatory requirements, and that they would also find ways to 'tunnel under' ring fencing requirements.
Global Banking News-November 15, 2012--Senior banker in UK says that ring fencing could create moral hazards(C)2012 ENPublishing - http://www.
Stephen Hester, chief executive at Royal Bank of Scotland(LON: RBS), has said that forcing ring fencing leads people to believe that in case of a crisis, the ring fenced banks would somehow always be bailed out, according to a Reuters report.
John Vickers headed the Independent Commission on Banking (ICB), which recommended ring fencing of banks in the UK.
The CEO of Barclays Plc (LSE: BARC) has said that ring fencing his bank would not affect the firm's prospects.
Banks in the euro zone are getting ready to face a review, which will discuss reforms to the banking structure, the most important recommendation being that of ring fencing.
Global Banking News-September 24, 2012--Volcker says ring fencing banks not the end of regulation(C)2012 ENPublishing - http://www.