Paul Tucker Backs George Osborne in Vickers Warning to Banking Commission

Paul Tucker has cosied-up to George Osborne, the man who decides if he should be appointed as the next governor of the Bank of England, by expressing similar concerns over the potential for the Parliamentary Commission on Banking Standards to trample over progress made into financial sector reform by the Vickers report.

Tucker, who is currently a deputy governor at the central bank and the bookies' favourite to take the top role, was giving evidence to the commission a day after the chancellor's appearance.

Osborne had warned the commission not to "tear up" the two years of work that had gone into the Vickers report, which recommended ring-fencing retail from investment banking and a higher capital buffer requirement for financial institutions.

"I absolutely agree that we should get on with Vickers and I think it will be damaging in all sorts of ways, most importantly to credit conditions if there is a further prolonged period," Tucker told the commission, which was set up in the wake of the Libor scandal and is due to report by the end of the year.

He also shared Osborne's worries on a complete separation of retail and investment banking.

"Even if we go for a full separation, the challenges of culture in retail banking stem in part from infection from investment banking, but I don't think they arise entirely from that," Tucker said.

"There's been an industrialisation of high street banking. They've drifted away from relationship banking.

"Branch managers are much less empowered than they were 20 or 30 years ago and that is a major problem of cultural change in its own right, irrespective of what happens to global investment banking."

Tucker said the question on a full separation "is not well defined".

It put him at odds with Sir Mervyn King, outgoing governor of the Bank of England, who appeared alongside Tucker at the commission hearing.

King, who will step down from his role in June 2013, expressed his preference for a complete separation of retail and investment banking, which would include banning the sale of derivatives over the counter of banks inside the ring-fence.

Osborne had previously told the commission that the sale of simple derivatives products in retail banking is a good thing as small businesses use them to hedge against their risk exposures.

Preventing the sale of simpler derivatives in the retail side of banking would drive these individuals and firms to the investment sector, where they would end up paying more and for riskier products.

However King did share Tucker's view that the problems in retail banking do not simply extend from the investment side.

"Even if we were to go to full separation, the challenges of culture in retail banking stem in part from infection from investment banking but I don't think they arise entirely from that," he said.

King also called for clarity in the legislation that divides the financial sector to help the new regulators, who will be at the Bank of England.

"I would be worried if the definition of a ring-fence were left to the regulator to decide," he told the commission.