Volcker warns on split of banks, derivatives desks

WASHINGTON (Reuters) - White House economic adviser Paul Volcker said in a letter that he has concerns about the “extensive reach” of a controversial Senate proposal that could force banks to spin off their swaps desks.

Volcker, in a letter dated May 6 to lawmakers and Treasury Secretary Timothy Geithner, said banks need to still serve their customers’ hedging needs.

“The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited,” Volcker said.

Democratic Senator Blanche Lincoln last month proposed that banks essentially be forced to spin off their derivatives desks, but she has since clarified that the desks could remain as an affiliate within a bank holding company structure.

Reporting by Rachelle Younglai, Kristina Cooke and Roberta Rampton