Bank of England governor Sir Mervyn King says the bank ringfence proposals should be subject to a compulsory review after five years.
Giving evidence to the Parliamentary Commission on Banking Standards today, King said the current ringfence rules should be implemented with the possibility of full separation in the future.
PCBS chair Andrew Tyrie asked whether the Bank of England should retain some contingency power to implement full separation in the event of non-compliance with the ring-fence.
Former Federal Reserve chairman Paul Volcker has described the ringfence as “porous” adding that it “breaks down over time” but a reserve power of separation would intend to act as a deterrent.
But King said: “We are always being told that the Bank of England is far too powerful, this is another power I do not want to receive.
“I would prefer to reconstitute a successor body five years down the road to review how far the ringfence in Vickers has worked and whether any amendments are needed.
“In other words, to build in a compulsory review which could not be avoided or put off and had to take place to find out if there had been too much burrowing under the ringfence or not.”
He expressed concern that the regulator would be very reluctant to implement full separation without the approval of parliament because of the significance of the power, claiming the banking sector would “descend on parliament” to lobby against it.
Tyrie said: “One of the biggest risks to the Government’s proposed ring fence lies in its permeability over time. I note that the Bank is trying, as we are trying, to think of ways the legislation can be improved to address this concern.”