Paul Volcker, the former Federal Reserve chairman, made a direct pitch to Congress yesterday in an effort to ensure that his proposed ban on proprietary trading by banks would survive legislative scrutiny.

Mr Volcker, whose ideas for splitting the banking industry received an unexpected endorsement from President Barack Obama last month, told the Senate banking committee in written testimony his initiative would help end the concept of “too big to fail”.

Under the so-called “Volcker rule”, riskier proprietary trading operations would be separated from more traditional banking. Groups that profit from in-house hedge funds, private equity firms or trading for their own account should not benefit from implicit or explicit government guarantees.

Mr Volcker, who chairs a presidential advisory board, dismissed industry concern that it was difficult to separate proprietary trading from the buying and selling conducted on behalf of customers. “Every banker I speak with knows very well what ‘proprietary trading' means and implies,” he said.

He said while trading would be allowed if it was undertaken for customers, regulators should clamp down on any bets that fell outside this remit. “There will be temptations to speculate by aggressive, highly remunerated traders,” he noted.

The Volcker proposal would allow hedge funds and other smaller institutions to continue aggressive bets as long as they were allowed to live and die by their actions.

Critics argue that companies such as Bear Stearns and Lehman Brothers, which failed during the crisis, would not have been affected by the rule.