Paul Volcker, former Federal Reserve Chairman and architect of the Volcker Rule,
testified On October 17, 2012 before a joint British Parliamentary Commission on banking standards.
He answered questions on the differences between the US and UK banking systems along with questions that focused specifically on America’s recent experiences with regulatory reform. Notably, Volcker criticized the UK's proposed "ring fencing" approach to separating banking firms' retail commercial, deposit-taking banking from their investment banking businesses. Though Mr. Volcker did say that ring fencing could be quite effective in the short run, the exceptions to the ring fencing rules may doom the concept's effectiveness in the long run. He drew a parallel with the US's experience with the Glass-Steagall wall of separation between commercial and investment banking. Financial firms began chipping away at the exceptions in Glass-Steagall almost immediately with the creation of subsidiaries and adding more of what was possible for a subsidiary to do in the securities area, eventually all but blunting the effect of Glass-Steagall restrictions. In his opinion, said Volker, the only truly effective tactic is institutional separation of retail banking, proprietary trading, and sponsoring of hedge funds.
Despite his criticisms, Mr. Volcker testified that ring-fencing is somewhat effective, and the concept shares a common purpose with the Volcker Rule and the Dodd-Frank: to create a real separation between retail and commercial banking, and between traditional retail banking activities and proprietary trading and sponsoring hedge funds. Further, he believes that traditional banking activities, for which banks have a fiduciary duty, should continue to receive governmental backstops, while proprietary trading activities where no such duty exists should be allowed to prosper or fail on their own, with no expectation of public support. To the extent ring-fencing serves this end, Volcker sees merit in the concept.
Mr. Volcker did receive some push back from the parliamentary committee. Some commented that ring-fenced subsidiaries would have an independent board of trustees or directors. Volker argued that the effect of these independent boards is limited because the subsidiaries are ultimately responsible to the bank holding company's board, and shareholders of the bank holding company have stakes in both the retail and commercial banking activities of the the company, and the boards have a fiduciary duty to those shareholders.