Former Federal Reserve chairman Paul Volcker has hit out at Sir John Vickers’ proposals to implement a UK banking ring-fence, saying it will break down over time.
Speaking to the Parliamentary Commission on Banking Standards yesterday, Volcker said the only way to ensure separation of trading and retail is to create two separate companies.
Volcker was Fed chairman from 1979 to 1987 and lends his name to the ban on proprietary trading in retail banks – the Volcker rule – as outlined in US banking reforms known as Dodd-Frank.
He said: “The ring-fence tends to break down because pressure from the institutions themselves tend to weaken distinctions.
“I am not saying it would be totally ineffective, I do not mean to suggest that, but when I read Vickers it says it is going to have a ring-fence but there are exceptions to it. I understand the need for exceptions but it gives the banks leverage.
“I will forecast, without any question, that once you have a ring-fence with exceptions the banks will say, ‘yes but let’s have this exception a little bigger’ and ‘this is a little awkward so will it serve the customer?’.”
Volcker compares the reforms to Glass-Steagall restrictions in the US and says it is a “cautionary lesson” as the internal separations broke down.
He said: “Banks will have the same customer in two parts of the same organisation and to think either part is not going to take account of that when dealing with the customers seems a little strange.
“I understand why you want the separation but my point is you should put it in a different company. For some reason there was a feeling that was not realistic.”