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Taylor Sees Case for Splitting U.K. Banks If Firewall Fails

Former Barclays Plc Chief Executive Officer Martin Taylor said regulators should be given the power to fully split banks along retail and investment lines if proposed arrangements for a firewall fail.

Legislation making its way through Parliament to force banks to erect firewalls represents a “superior solution,” though a full split may be necessary if the industry proves “unreformable,” Taylor told lawmakers investigating banking standards in London today.

There “would be a case for going further” if the plans are diluted, said Taylor, who was also a member of the Independent Commission on Banking that proposed the firewall. “If you give the regulators the powers that the draft bill foresees, you would have some pretty strong defenses. But defenses need keeping up.”

Chancellor of the Exchequer George Osborne in June accepted the overwhelming majority of the ICB report, while watering down recommendations on how much capital lenders must hold. That prompted criticism from John Vickers, who led the commission, and Taylor said today the decision “is simply a mistake.”

The Parliamentary Commission on Banking Standards, which was set up following the scandal over the manipulation of the London Inter-Bank Offered Rate, today published written testimony from Alan Budd, a former Barclays executive and Bank of England policy maker.

Solutions

“Breaking up the universal banks may make the clearing retail side better (and increase the confidence of its customers) but make the investment banking side worse,” Budd said, according to the statement. “If problems are more likely to arise on the investment banking side, that is where the solutions have to be found.”

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

Attending a hearing of the panel in London on Oct. 17, Volcker said the recommendations of Britain’s banking commission may be eroded by financial institutions looking to take advantage of “exceptions” in the proposals.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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