Magazine article American Banker

Volcker Plays Down Usefulness of Firewalls in Remarks to Panel

Magazine article American Banker

Volcker Plays Down Usefulness of Firewalls in Remarks to Panel

Article excerpt

Former Federal Reserve Chairman Paul A. Volcker on Wednesday downplayed the need for the strict separations between an insured bank and a securities affiliate contained in House Banking Committee Chairman Jim Leach's Glass-Steagall bill.

Mr. Volcker, who still carries considerable weight on Capitol Hill, recommended making the firewalls between a bank and a securities affiliate as "light as practical."

"Who would want to hold these two kinds of business operations if there is no connection between them at all? It defeats the purpose," Mr. Volcker said.

"There are going to be synergies . . . and referrals between the two arms" of the holding company, the former central banker added.

In place of rigid firewalls, Mr. Volcker suggested strict oversight of holding companies by the Fed, something that the Iowa Republican does provide for in his legislation.

However, the chairman's bill would also create strong firewalls to insulate an insured institution from the riskier activities that may take place in a securities affiliate.

Mr. Volcker's stance on firewalls surprised Rep. Marge Roukema, chairman of the subcommittee on financial institutions.

"I'm a little taken aback by your description of firewalls," said the New Jersey Republican, who has expressed concerns about the ability of firewalls to protect an insured depository from an ailing affiliate.

Mr. Volcker's testimony came during the House Banking Committee's final hearing on Glass-Steagall reform. Rep. Leach announced that the committee will vote on his industry modernization bill on May 9. …

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