The Obama administration put forward legislation on Wednesday to rein in the size and scope of the nation’s largest banks. But the proposal faces strong resistance in Congress, where lawmakers have shown little appetite for adding to the prolonged debate on overhauling financial regulations, Sewell Chan reports in the New York Times.
The legislation would ban banks that take federally insured deposits from investing in hedge funds or private equity funds and from making trades that are for the benefit of the banks, not their customers, a practice known as proprietary trading.
Goldman Sachs and Morgan Stanley would probably be the Wall Street firms most affected by the ban, known informally as the Volcker Rule, but they might be able to shed their status as bank holding companies, to avoid some of the restrictions.
The legislation also would ban any bank from acquiring another bank if the merged company would have more than 10 percent of all liabilities in the financial system.
When President Obama presented the Volcker Rule, named for its champion, Paul A. Volcker, the former Federal Reserve chairman, on Jan. 21, he argued that banks that benefit from the government safety net should not take undue risks.
Mr. Volcker said through a spokesman on Wednesday, “I have not seen the final version, but from what I understand, it is good, tough language.”
The Volcker Rule counts among its supporters five former Treasury secretaries, elder statesmen like William H. Donaldson and John S. Reed and prominent investors like George Soros. But when Mr. Volcker and the deputy Treasury secretary, Neal S. Wolin, presented the plan to the Senate last month, they were met with a frosty reception.
Senators said the rule would not have prevented the financial crisis or saved companies like Bear Stearns, Lehman Brothers and the American International Group. They said the idea, as outlined by President Obama, was vague and difficult to enforce. And representatives of Goldman Sachs and JPMorgan Chase testified that limits on risk-taking could be achieved by other means.
Another concern is that the rule would encourage banks to take flight to other countries with fewer restrictions on speculative trading.
After meeting in Brussels, European finance ministers said in a policy paper on Feb. 10 that while they “support the overarching aim of reducing the buildup of risks in the financial system,” any new policy should “avoid pushing risks to other parts of the financial system.”
As proposed by the Treasury Department, the Volcker Rule would define proprietary trading as the purchase and sale of stocks, bonds, commodities and derivatives for the institution’s or company’s own trading book, and not on behalf of a customer.
The legislation would also seek to restrict proprietary trading by nonbank financial institutions by directing the Federal Reserve to set “capital and quantitative limits” on such trading. Congress is considering proposals that would give the Fed supervision over the largest and most interconnected financial institutions, not just the bank holding companies and state-chartered member banks it now oversees.
The second part of the legislation would prohibit financial institutions from assuming, by acquisition, more than 10 percent of all liabilities in the financial system. The idea is an outgrowth of a cap, in place since 1994, on the share of deposits that any one institution can hold.
Jockeying over other elements of overhauling financial regulations continued Wednesday.
The Treasury secretary, Timothy F. Geithner, and a senior White House adviser, Valerie Jarrett, told representatives of AARP, the A.F.L.-C.I.O., and consumer and civil rights groups that Mr. Obama was committed to creating an agency to protect consumers from abusive financial products, with an independent director and budget and the power to write and enforce rules.