Stephen Foley: Take that, Paul Volcker

Outlook: It has become almost taboo to criticise Paul Volcker, the former chairman of the US Federal Reserve, whose sepia-tinted plan to break up the banks has unfortunately become a touchstone of the debate on financial reform. If you are against the "Volcker rule", you must be for Wall Street, so watch out for pitchforks.

The rule, you will remember, is that no bank enjoying federal deposit insurance (and therefore an implied guarantee from US taxpayer) ought to be allowed to gamble with its own money. In his version, that means spinning off proprietary trading and in-house hedge funds. The Senate looks as if it will instead ask banks to hive off their derivatives businesses.

The logic escapes me, since banks by definition put their own capital at risk, prop-trading desks did not contribute to the credit crisis, and a properly regulated derivatives business is a legitimate way for a bank to service its clients.

Tim Geithner, the Treasury Secretary, put the anti-Volcker case to the Financial Crisis Inquiry Commission this week – without naming the former Fed chairman. It was brilliantly argued and eviscerating.

Devastating runs on the traditional banking system were consigned to the past thanks to the Fed guarantee and tight regulation after 1933. The shadow banking system, made up of hedge funds, insurers and other vehicles via which some $8trillion (£5.4trn) of credit was advanced in the US at its peak, suffered its first major run in 2008. What is needed is a tough system of regulation that brings shadow banking institutions under the sort of control imposed on traditional banks – not a break-up that pushes risky activities back out into the shadows.