17 October 2012

FTAdviser: Volcker warns about ring-fence jumping

A ring-fence on retail banking, as proposed by the Independent Commission on Banking and backed by the UK government, would become permeable over time, Paul Volcker has warned. (Includes comment on Volcker's appearance before the Commission by Chairman of the PCBS, Andrew Tyrie MP.)

Veteran US economist Mr Volcker told the Banking Standards Joint Committee as part of its inquiry into culture in the financial sector, that banks would look to extend exemptions on plans to ring-fence retail assets. He said: “A ring-fence is permeable over time. I am not saying it would be ineffective, but from what I read about it, there will be exceptions on the ring-fence. That is where the problem begins."

Mr Volcker has proposed an alternative method of separation in the US, known as the Volcker rule, which would prevent commercial banks from owning and investing in hedge funds and private equity, and limit the trading they do for their own accounts. He said banks got into trouble when they began mixing customer relationships with trading. He warned mixing the two creates a conflict of interest.

The Independent Commission on Banking was set up in June 2010 and chaired by Sir John Vickers. In September 2011 it recommended ring-fencing retail banking, a suggestion the government has pledged to introduce.

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Commenting on the appearance of Mr Volcker before the Commission, the Chairman of the PCBS, Andrew Tyrie MP, said: 

"The UK and America are world leaders in financial services. Public trust in banks plummeted as a result of the banking crisis in both these countries. Between us, we must lead the way in restoring that trust. There is no-one better placed than Paul Volcker to shine some light on the standards and culture prevailing in the US banking industry. In addition to his vast industry experience, Mr Volcker has been at the forefront of recent regulatory attempts to reform the American banking system.

The Commission will want to hear Mr Volcker’s thoughts on America’s recent experiences with regulatory reform; on the steps that have been taken, on areas that require further work and on how these proposals compare with those put forward in other countries, not least in the UK. Banking is one of the UK’s most important industries. This is an inter-connected, global industry with long-standing, global problems. There are good arguments for more cooperation between regulators, in order to secure better standards across the world and to avoid regulatory arbitrage."

Parliamentary Commission on Banking Standards questions Paul Volcker © Parliamentary Copyright

© Financial Times