Ring-Fence
Candlefocus EditorThe concept of a ring-fence was originally used in the context of offshore banking, where it would provide a financial shield for depositors’ assets against any financial instability in the country. This idea has since been extended to other industries and sectors.
In the banking industry, ring-fencing is an important measure taken to safeguard a bank's deposits. Banks that receive deposits from individuals and businesses are required to keep an amount of liquid assets (cash, securities and other banking instruments) as part of their risk management strategies. Ring-fencing these assets serves to insulate them from any potential losses resulting from bad investments or other types of malpractice.
In addition to the banking sector, corporate companies are also making use of this practice to protect the profits earned through their operations. This is particularly common in the oil and gas industry, where companies ring-fence a portion of their revenue to offset any losses related to fluctuations in the market or unexpected events.
Lastly, investors also use ring-fencing to protect some of their funds from market volatility or bad investments. By isolating a portion of their funds, investors ensure that they will not be completely wiped out in the event of an unlucky investment or an unexpected dip in the market.
All in all, ring-fencing allows financial institutions and investors to safeguard a portion of their assets and protect themselves from various risks. While this practice cannot completely eliminate the risk and volatility associated with investments, it can certainly provide a buffer that cushions potential losses.