PAUL VOLCKER, a former US Federal Reserve chairman and the most effective central bank governor of modern times, has criticised British proposals for the reform of its banking system. The US and Mr Volcker favour a complete separation between investment banks and retail banks. Britain – following the report of the banking commission chaired by Sir John Vickers and published last month – does not.
The Vickers report proposed “ringfencing” rather than separating these banks. Retail banks would be ringfenced against the failure of their investment banking arms. Mr Volcker, however, strongly disagrees. He fears this approach is wholly inadequate and will fail to protect taxpayers should another major financial crisis arise. His proposals – best known as the Volcker rule – have yet to be adopted fully in the US. They involve a ban on banks engaging in proprietary trading – or trading for their own profit. In order to minimise financial risk and to protect taxpayers, retail banks that take deposits would no longer be allowed to trade on their own behalf.
The US and UK attitudes to the structural reform of banks are defined by these important differences. The EU single market commissioner, Michel Barnier, has established a similar banking review group that will report next month. It is expected to favour elements of both the US and the UK positions, and in addition to recommend limits on bank bonuses. The financial threat that the aggressive trading culture in investment banks presents is still apparent. In London a former Swiss bank trader is facing fraud and false accounting charges amounting to $2.3 billion (€1.77 billion) for his irregular trading activities. The global financial crisis has already had a depressing effect on the animal spirits of investment bankers. The profits of investment banks have been greatly reduced and bankers’ pay and bonuses cut sharply, with far fewer employed in the banking sector.
In Britain, the banks have been given a seven-year deadline to implement the ringfencing reforms outlined in the Vickers report. As they do, criticism of those reforms is not confined solely to the influential Mr Volcker, whose experience and authority is unquestioned. Sir Mervyn King, the Bank of England’s departing governor, has voiced similar reservations to those of Mr Volcker. He too has indicated a clear preference for total separation of the retail and investment arms of banks, as the best means of ensuring taxpayers never again have to rescue banks that have become too big to fail.