Financial System Inquiry panel member Kevin Davis says the Inquiry is interested in the issue of ring-fencing because of the role it would play in the resolution process if a financial institution were to fail.Earlier this month the Inquiry's chairman David Murray surprised the industry when he said the Inquiry should consider whether Australian policy makers should follow the lead of US and UK regulators by separating retail and investment banking activities.Davis, who is also professor of finance at the University of Melbourne, was speaking at an Australian Centre for Financial Studies forum yesterday, when he said: "One of the things that has happened overseas is ring-fencing - structural separation. To me the question is: if other countries are doing it, what is there about our system that says we should not do that?"Most academics would say ring-fencing is about managing the spillover of risk from one part of the institution to another."Now the debate is about resolution issues. If interests are so complex you cannot resolve it, then you need separation."The managing director of consultancy Erskinomics, Alex Erskine, told the forum that ring-fencing may be needed to deal with banks' vertical integration of wealth management and insurance rather than their trading businesses.Erskine said: "Our banks are not so extreme on some of their commercial bets. But they have moved a long way on vertical integration. That is the area we are going to have to focus on."KPMG partner Andrew Dickinson said ring-fencing was not needed. "It is a problem for overseas market but it does not exist to the same extent here. Our institutions are traditional banks. They don't have significant proprietary trading businesses"As we have seen with Volcker [in the US] it is very difficult to achieve separation," Dickinson said."It can be better done by regulators having a good understanding of the risks institutions are taking and using their regulatory powers."I can't see why there is a concern about banks going into wealth management and insurance. What is the systemic risk?Tom Valentine, the chairman and executive director of Salisbury Group and a member of the Campbell committee, said: "You don't want to separate market makers from institutions. That would increase instability instead of reducing it."