InfoBytes, Regulatory Restructuring Report, Issue 14, January 22, 2010
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President Announces Plan to Restrict Size and Scope of Banks
On January 21, President Obama announced a new proposal, which he called the “Volcker Rule,” aimed at restricting the size and scope of banks and financial institutions. The President intends that the proposal be included in the financial regulatory reform legislation currently being considered in Congress.
The full details of the plan, including any specific legislative language, have not been released. However, in general, the President’s proposal would (i) prevent banks or financial institutions that contain a bank from owning, investing in, or sponsoring a hedge fund, private equity fund, or proprietary trading operations for their own profit and unrelated to servicing customers, and (ii) broaden limitations on growth of liabilities at the largest financial firms, akin to the current deposit cap. In the press conference announcing the proposal, the President stated that privileges such as deposit insurance and other guarantees were “not created to bestow banks operating hedge funds or private equity funds with an unfair advantage” and that it is “not appropriate for [banks] to turn around and use that cheap money to trade for profit.”
In a press release, House Financial Services Committee Chairman Barney Frank (D-MA) supported the President’s proposals, stating that they “build on” provisions already included in the Wall Street Reform and Consumer Protection Act, which passed the House on December 11. Chairman Frank specifically noted the adoption of an amendment offered by Rep. Paul Kanjorski (D-PA), which would give federal regulators the authority to accomplish the two facets of the “Volcker Rule” by dismantling financial firms deemed sufficiently large or risky that their collapse would endanger the U.S. economic system. In addition, the House bill includes language offered as an amendment by Reps. Brad Miller (D-NC) and Ed Perlmutter (D-CO) that would grant the Federal Reserve Board the authority to prohibit companies designated as “systemically significant” from engaging in proprietary trading.
Senate Banking Committee Chairman Christopher Dodd (D-CT), whose financial regulatory reform proposal is still being negotiated in the Committee, appeared to support President Obama’s proposal via Twitter. Senator Dodd replied to the President’s Twitter account: “I agree that taxpayers should not be underwriting these risky activities” and that “[c]ompanies that choose to take such risks should do so on their own dime and not in a way that threatens the stability of our economy.”
The White House press release is available at http://www.whitehouse.gov/blog/2010/01/21/president-obama-never-again-will-american-taxpayer-be-held-hostage-a-bank-too-big-fa and the fact sheet is available at http://www.whitehouse.gov/the-press-office/president-obama-calls-new-restrictions-size-and-scope-financial-institutions-rein-e.