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.
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.
“I understand the need for exceptions, but I will forecast that banks will say lets make this exception bigger.”
Mr Volcker has worked in economics since 1952, and provided economic advice to two former US presidents.
He told the committee: “Potentially you will get the same customers in two parts of the same organisation, banks have to consider how that will work.”
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.