Paul Volcker: ring-fencing banks is not enough

The Telegraph ^ | 9/23/2012 | Helia Ebrahimi,

[bruinbirdman]

In an exclusive interview with The Daily Telegraph, Mr Volcker said that plans to force banks in the UK to ring-fence their traditional retail arms from "casino" investment divisions would not work in the event of a bail out. Ringfencing, he said, would only work in "fair-weather" conditions but not when banks were under pressure.

"In my experience ring-fencing is not terribly effective," said Mr Volcker. The criticism comes less than a month after the publication of Sir John Vickers' banking reform proposals.

The report, which was aimed at shaking up British banking, opted for ring fencing rather than a complete separation of retail banking from riskier investment banking divisions. The cost of ring-fencing is estimated to be between £4bn-£7bn, but many of its critics question whether it can adequately cordon off retail deposits, which are implicitly guaranteed by the Government.

Mr Volcker said: "John (Vickers) and I have the same concerns in mind. But the logic would be to separate the two parts of banking, not to keep them within the same institution. I find it puzzling to suggest that within one organisation you can have a branch that is entirely independent of another subsidiary, with the confidence that never the twain shall meet?"

Mr Volcker said that it was unclear how the two parts of banking could be entirely independent when under ring fencing they would be subordinated to the holding company.

"I think they bowed to practicality. But Vickers will now have to define what is allowed in the relationships between the two subsidiaries.

"Ultimately, there is a natural instinct to have a close relationship within a bank.

[SierraWasp]

They're talking about a Glass-Steagle act like we used to have here, aren't they? I'd agree with Volker about locking the stable door after all the horses have gotten out, wouldn't you?

gritmos

[Graewoulf]

” - - - Ringfencing, he said, would only work in “fair-weather” conditions but not when banks were under pressure. - - - “

Duh, that sounds like some bird-brain economist talking.

Whoever he is, he could not be as stupid as the economist who came up with the idiotic “To Big To Fail” Socialist crap.

[bruinbirdman]

Volker knows all those funds are comingled. It can only be undone with minimal damage during stable economic times or in a meltdown disaster when no one would be able to feel the damage/difference.

yitbos

[Graewoulf]

” - - - Volker knows all - - - “

Every living Economist that I read about has an abysmal track record of what they predicted and the reality of what transpired after their predictions.

Paul Volker is by far the very worst modern living economist.

My standard of excellence is the late Milton Friedman.

BTW, do you have any interest in posting a thread on “What would Milton Friedman Say” about some of our financial nightmares? Please ping me if you post that thread, or see a thread that has beat you to it.