Volcker Says Successful Ring-Fencing of Banks Is ‘Difficult’

Former U.S. Federal Reserve Chairman Paul Volcker said the successful ringfencing of banks’ operations is very difficult to maintain and financial institutions will seek to unwind separations over time.

“Based on the American experience, the concept that different subsidiaries of a single commercial banking organization can maintain total independence either in practice or in public perception is difficult to sustain,” Volcker said in comments submitted to the U.K. parliament’s Commission on Banking Standards.

Attending a hearing of the panel in London today, Volcker said the recommendations of Britain’s Independent Commission on Banking may be eroded by financial institutions looking to take advantage of “exceptions” in the proposals. The recommendations include having lenders insulate consumer units from investment banking operations.

“I understand the need for exceptions, but that gives the leverage,” Volcker told lawmakers at the hearing. “Once you do this, have these exceptions, the banks will say, ‘let’s make this exception a little bigger, this is a little awkward.’”

He said the rules “tend to be permeable over time.”

“In my experience they tend to break down over time because pressures from the institution itself,” Volcker said.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net