Electric ring-fence around banks 'like trying to control POWs in Colditz', says Jon Moulton Mr Moulton said banks would always try to get around the rules and only a complete separation of so-called casino banking operation from the retail side would work. He said the Glass-Steagall Act, introduced in the US after the 1930s financial crash separating investment banking operations from retail banks, prevented any substantial bank failure for around 40 year and showed separation can work. If you put up a big tall electric fence, why bother not separating. Big tall ring-fences are separation," he said. You are going to have regulators to try to administer this big tough electric fence. Bright people fighting and an impossible task rather like trying to control POWs in Colditz. Why bother. It's just going to be futile. His comments come two days after Swiss bank UBS was fined £940m by regulators in the UK, US and Switzerland for manipulating the key Libor rate on an "epic scale" and two former traders at the bank were charged with conspiracy. Mr Tyrie told Radio 4 that evidence to the commission was that separation still carried a cost and an "electrified ring-fencing" option enabled banks to provide a wide range of financial services at a lower cost to customers. He said the Commission wanted to "give ring-fencing a chance." "The Vickers report proposed quite a high degree of separation and quite a strong ring-fence, the Government watered that down in their proposals," he said. What we have done is put back some of the stiff separation and then made clear the key problem ... which is that banks will be at this ring-fence trying to get through which will be a nightmare for regulators and needs to be dealt with. He said the way to deal with that was to tell banks "if you obey the rule and if you don't try to game this ring-fence, we won't be around to see you to separate you." Mr Tyrie said his commission had looked to recommend measures which would improve banks' behaviour long-term. "If you know the fence is electrified, you're less likely to go and poke it to find a hole," he said. At the moment, the banks will probably behave but in the long run they will find a way of gaming the ring-fence if they don't have a strong disincentive to do so. Politicians too could easily succumb to the siren voices of the lobbying they have to put up with from banks. "In the long run they will find a way to game the ring-fence if they do not have a strong incentive not to," he said. We're discussing this in a climate of relative crisis but one day, it's difficult to imagine, in 10 or 20 years' time, there will be a clear blue sky with no clouds on the banks' horizon, and people will get complacent. It's at that point it's crucial you have a set of rules and a system in place that can keep banks away from testing the ring-fence. Shadow chancellor Ed Balls said: "This is an important cross-party report which sets out real challenges for the banks, government and Parliament. After repeated scandals, from Libor-fixing to mis-selling to small businesses, it is clear that we need radical reform of our banks. If the letter and spirit of the Vickers proposals are not delivered and we do not see cultural change in our banks, full separation will be necessary. The Commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks. Mr Balls said he believed people were very frustrated about banking reform, because of the length of the process. Mr Tyrie said the UBS Libor revelations "beggar belief" and were "the clearest illustration yet that a great deal more needs to be done to restore standards in banking." The report will be seen as a major challenge to the Government's reform of the banking industry. George Osborne has urged the Commission - and parliament - not to "tear up all the work that's been done over the last two years" by changing the Bill. "I would just caution parliament about starting all over again because that would inevitably delay things and I think we have got to a good place where broadly we have a consensus," he told the Commission when he was giving evidence last month. Today's report drew criticism from industry groups who warned banks needed certainty over the shape of future regulation. The Federation of Small Businesses welcomed the Commission's proposals. "Ring-fencing, and potentially the additional safeguards of 'electrification" and possible structural separation will allow the investment arm of a bank to be sold or wound down, and will mean a safer and more secure banking sector," said John Walker, national chairman of the FSB.