Regular readers know that the Blob (aka, politicians, financial regulators, Wall Street and City banks and their lobbyists) blunts reform by adopting solutions that require complex rules and regulatory oversight to implement as a substitute for transparency and market discipline.
Ring-fencing is a classic example of this type of solution. It is this need for complex rules and regulatory oversight that Mr. Volcker sees as the reason that ring-fencing will fail.
Compare and contrast ring-fencing with requiring banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
Ring-fencing is going to take hundreds of pages of rules while ultra transparency take one simple rule on one page.
Ring-fencing leaves the banks subject to only regulatory oversight while ultra transparency leaves the banks subject to market discipline.
It is common sense that ultra transparency will be more effective for far longer than ring-fencing.
Paul Volcker, the former chairman of the Federal Reserve, has told British MPs that their plans to force banks to separate retail services from risky investments were a welcome approach but would be hard to achieve....
[S]eparating the two types of banking would be "effective to a considerable extent" in allowing risky parts of banks to fail without damaging the main business.
But he told a parliamentary inquiry on banking standards that putting the theory into practice was not easy.
"Based on the American experience, the concept that different subsidiaries of a single commercial banking organisation can maintain total independence either in practice or in public perception is difficult to sustain," Volcker told the Parliamentary Commission on Banking Standards.
Banking reforms in the United States, Britain and Europe all require "careful regulatory definitions and supervisory oversight" to ensure functions are kept separate, he said....Banking reform dies because of the focus on these 'careful regulatory definitions and supervisory oversight'.
Volcker said there were holes in such a system that "are likely to get bigger over time".Reform based on complex rules by definition has holes that will grow bigger over time. That is why the Blob wants it.
"It's all kind of awkward," he said in regard to setting up separate subsidiaries. "I don't know what it means to have an independent board that is a subsidiary of another board."It means that the Blob has an opportunity to undermine true bank reform.
The biggest hole in how banking reform is being done is that it substitutes complex rules and supervisory oversight for transparency and market discipline.
From the Guardian,
One of the world's most experienced financial regulators said plans to ringfence investment banking arms of banks from high street operations would encourage bosses to seek loopholes...That is why the Blob prefers this type of bank reform solution over ultra transparency which is both simple to understand and simple to implement.
Volcker said a ringfence was complex and difficult to regulate compared with simply splitting investment banking operations into a separate firm.
"When you adopt a ringfence, pressures from inside the organisation tends to weaken the restrictions," Volker said.
"I'm not saying it will be totally ineffective, but the Vickers report says it is going to have a ringfence with exceptions, and once you go down that road of having exceptions the [banking] organisation is going to push for more exceptions and widen the limits," he said....
He said the UK had adopted an outmoded view of banking services that categorised services designed to support business customers with the casino activities that brought about the crash.
He also told the commission that the UK had chosen to ringfence the wrong parts of the bank.
"While I would leave lots of services in the core of the bank, I would separate proprietary trading into a separate firm, which can go bust if it gets the risk management wrong," he said.Frankly, by simply requiring the banks to provide ultra transparency, you can end their proprietary trading and not engage in the ring-fencing exercise.