Firewalls

I hadn't thought too much about the "Volker's Rules" unveiled last week -- breaking apart the major banks' retail banking and investment banking sides -- because in the era of global banking, a unilateral U.S. move might have some effect, but not enough to stop the next banking meltdown. Nevertheless, the idea made sense to me, but critics -- especially those on Wall Street -- called it empty populism by Obama. And Gordon Brown, probably speaking for other European leaders, dismissed the very idea.

But now, the head of the Bank of England has stepped forward to say he likes the plan.

LONDON — Mervyn A. King, the governor of the Bank of England, is an owlish, self-effacing man who, in contrast to his more outspoken peers in Frankfurt and Washington, strikes a public posture that borders on the demure.

But as outrage over lush banking profits gathers steam on both sides of the Atlantic, Mr. King finds himself at the vanguard of a growing movement that argues that big banks must separate their higher-risk trading and investment banking businesses from their core deposit-taking functions.

Last week, such a proposal pushed by the former Federal Reserve chairman Paul A. Volcker made headway. President Obama shocked Wall Street by proposing that large banks that collect customer deposits be banned from engaging in proprietary trading activities.

At a hearing before a parliamentary treasury committee on Tuesday, Mr. King used some of his strongest language yet to support such a separation. In the process, he hailed Mr. Obama for having moved so quickly.

“The U.S. has been more open in moving to a safer banking system than we are,” he said. “After you ring-fence retail deposits, the statement that no one else gets bailed out becomes credible.”

To illustrate his point that increased regulation and higher capital requirements alone would not be sufficient to forestall another banking crisis, he pointed to Citigroup — which once was seen as a model for combining all banking functions under one roof.

“You had regulators in the building and four of the most respected people in the world running the bank,” he said, citing its architect, Sanford I. Weill; the former Treasury secretary Robert E. Rubin; the former International Monetary Fund official Stanley Fischer; and a veteran international banker, William Rhodes.

“They did not set out to destroy Citibank, but when you have a large complicated institution, things happen,” he said. “That is the argument for trying to create firewalls.”

Under post-Depression laws, bank holding companies in the United States were not allowed to own investment banks before 1999. But in Europe, no such division ever existed.

In fact, until last week such a notion had been roundly criticized, more a provocative debating point in an academic seminar than a practicable piece of legislation. Others speculated that the idea would surely be swatted away by muscular banking lobbies if it ever came close to becoming law.

Indeed, some see the idea, far-fetched and steeped in principle as it may be, as more an emblem of Mr. King’s own unyielding sense of what is right and what is wrong for the markets — albeit one that in this case is in tune with the public mood.

Over in Davos, Barney Frank thinks he can incorporate it into House legislation. George Soros embraces the idea as well, though he thinks it doesn't go far enough.