The Oracle of Omaha may love banks, but his sidekick says the time has come to break them up.

Charlie Munger, vice chairman of Berkshire Hathaway (BRK), says that banks should have significantly smaller trading operations and be more heavily regulated.

Berkshire Hathaway is among the largest holders of shares in Wells Fargo (WFC) American Express (AXP) and U.S. Bancorp (USB). The company also holds sizable stakes in Bank of New York Mellon (BK) and M&T Bancorp (MTB).

Warren Buffett, Berkshire's chairman and chief executive, has said he would like to buy more shares of both Wells Fargo and Amex.

"I think the banks should be more heavily regulated," Munger told CNN Money Sunday. "There should be fewer things they're allowed to do and they should do it with more simplicity."

"I don't think they should have vast derivative books and banks with insured deposits," Munger added. "I think that was a fundamental error that we ever allowed it."

Munger, who said his comments do not necessarily represent those of Buffett or Berkshire, suggested that legislation that would require banks to increase their capital cushions would be less effective than rules to restrict the ability of banks to trade for their own account. The Volcker rule provision in the 2010 Dodd-Frank Act would place limits on banks' proprietary trading, but regulators are still drafting the rule so it is unclear how restrictive it will be.

"I think if you increase the capital requirements and let them do whatever they wish they'll get in trouble again," Munger said. "It's the trading books …where I think the poison is."

Though Munger said he would be fine with "some ordinary underwriting" by banks, he would like to see banks focus mostly on lending. "Lending is what banks are supposed to do," Munger said. "That greases the wheels of commerce in the world. It would have been OK if underwriting never went near the banks."

Despite his concerns, Munger said that Berkshire never has considered pulling out of its bank investments. "We live in the world as it is and we don't expect the government policy to be the policy we would make" or expect companies Berkshire invests in "to agree with us on all subjects," Munger said.

Munger's prescription for the country would "obviously be different than the prescriptions of our leading banks, but I'd be delighted to have banks more simple, more restrained, more constructive, way lower trading operations. I think an ideal bank is pretty boring."

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