Ruminating over the merits of narrow banking as a possible Australian policy option lacks appeal to some observers.One of these, Credit Suisse commentator Sean Keane, prepared a vigorous rebuttal of the case for ring-fencing last night. "Volcker and Vickers [are] neither necessary nor appropriate for Australia," he said.The debate has been fired up again by an Australian Financial Review report on Monday of an interview with David Murray, chairman of the Financial System Inquiry, in which he floated the idea that Australia should consider "ring fencing" the trading activities of its banks in the same way that the Volcker rule has been applied in the United States and the Vickers rule in the United Kingdom.Murray did not state that such a policy should be implemented, but said it should be considered as an option. Simply raising the topic was a risky distraction, according to Keane. "The debate about whether such policies should be adopted in Australia is now likely to become part of the national discussion around the Financial System Inquiry, and it may even end up hijacking the whole thing and becoming the main talking point," he said."If that were to happen it would be a pity as there are many other points highlighted in the interim report that are worthy of discussion."Former APRA chair John Laker also had little time for ring-fencing proposals when he spoke at the University of Sydney last year. Laker, giving the Warren Hogan Memorial Lecture in November, stated: "The notion of 'narrow banking' is still with us," even if "not in the pure sense advocated by Hogan and others, but in the form of proposals — associated with the names of Volcker, Vickers and Liikanen — for the structural separation of retail banking from proprietary trading and other high-risk activities.""[This is] a complicated issue, but not one for Australia," Laker said.Keane predicted "opponents of such a proposal are likely to mobilise quite quickly, and to be led by Mike Smith at ANZ. "Opponents of ring fencing are likely to point out that given the relatively small amounts of investment banking activity and the fairly small amounts of proprietary risk capital deployed by the Australian banks a Volcker style rule would appear to be unnecessary. "If Murray does decide to push for a ban on proprietary trading in Australia it is likely only to be an expensive sideshow. "The real risk to antipodean banks exists in the asset and liability management functions of the commercial bank treasury's, and those risks are the ones that banks are supposed to take as they artfully manage the business of maturity transformation and basis risk," Keane concluded.The former governor of the Bank of England Mervyn King, who is currently in Australia, told the Australian Financial Review that Australia should look at the ring-fencing law adopted in England because it was designed to avoid "the terrible moral hazard" of taxpayers bailing out banks for risky investments made by their trading divisions.King said: "What you can't do is allow banks