Retail and investment arms 'must be totally separated'

Britain is running the risk of bankers chipping away at the Sir John Vickers' reforms until they are rendered useless, the Parliamentary Commission on Banking Standards was warned by the architect of the bank America's regulatory reforms.

Sir John's report called for retail banking operations to be "ring fenced" from more risky investment banking.

But Paul Volcker, the former chief of US Federal Reserve, said: "It (Sir John's report) says they are going to have a ring fence but they are going to have exceptions.

"Once you do this and you have exceptions the banks will say, yes well, lets make this one a little bigger because it is getting awkward."

Mr Volcker said Sir John's aims were the same as those contained in his Volcker rule, which bans US banks from proprietary trading, or using their own funds to place bets in the financial markets.

But he said: "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.

"If you want to separate operations clearly and decisively you put them in different organisations."

Mr Volcker rounded on critics of his own rules, notable among them JP Morgan's chief executive Jamie Dimon, who has railed against it in a long letter to his shareholders.

He said that the rule was only "about 35 pages" long with a similar appendix. The only reason it mushroomed to over 300 was as a result of needing to "answer questions put by lobbyists".

The rule is a key part of the US Dodd-Frank banking reforms, which Mitt Romney, the Republican Presidential candidate, has pledged to repeal if he wins the election.

Paul Volcker also renewed his attack yesterday on the destructive culture and bonus practices banks had allowed to build up.