Subscribe to the Finance Headline RSS feed | Subscribe to the Finance Headline feed via EmailARTICLE: Obama Outlines Two Proposals for Restricting Bank Size, Influence
January 22, 2010 in Banking Report · Leave a Comment
President Obama announced Jan. 21 two proposals that he is asking Congress to incorporate into pending financial reform legislation aimed at limiting the size and activities of banks and financial institutions.
Senior administration officials said the president has been working toward financial reform since coming into office, submitting a package to Capitol Hill last year. The bill sponsored by House Financial Services Committee Chairman Barney Frank (D-Mass.) has already passed the House.
Senate Banking Committee Chairman Christopher Dodd (D-Conn.) is working on a package in the Senate.
The legislation includes “core reforms” to the nation’s financial system, through a new consumer protection agency and by regulating over-the-counter derivatives market and other markets that helped contribute to the crisis, officials said.
Included in that package are provisions to ensure that regulators have the appropriate authority to limit conflicts of interest between banks and their activities in proprietary trading and hedge funds, officials said. Also, that regulators have the authority to break apart large firms and to limit their risky activities in the event they pose a threat to financial stability.
Two New Proposals.
Now, the administration has developed two new proposals to be added to that package that build on those provisions. “They are designed to further reduce the potential risk in our system and to prevent further concentration in our financial system,” an official said.
The first of those reforms is a limit on the scope of activities that banks, bank holding companies, and financial institutions that own banks can engage in, an official said.
Specifically, the proposal would use the broad authority outlined in the House bill for regulators to prevent commercial banks from owning, investing in, or advising hedge funds and private equity funds and limiting the proprietary trading that they do for their own account that is not related to their client business.
“So it moves them more to identifying their core business as being something like serving their clients,” he said.
This proposal has been under consideration for some time under the auspices of the Presidential Economic Recovery Advisory Board (PERAB), chaired by Paul Volker.
As the crisis winds down, the administration has seen major financial institutions that received special protections turn around and make significant profits on their proprietary trading, using their safety net to do that, which convinced the president to pursue these proposals, the officials said.
The second proposal would address the future landscape of the financial sector. It would be a limitation on the size of any one financial firm in relation to the whole sector.
“We want to be sure that in the future going forward financial firms don’t become overly concentrated in the financial sector,” an official said. The proposal would update an existing provision in the law.
Now, there is a 10 percent cap on the share of insured deposits that can be held by any one banking firm. The proposal would update that limitation to the broader range of financial firms now operating in the sector, taking into account the non-deposit funding that major firms are increasingly using.
The idea is to have a system in place that does not improperly incentivize non-depository leverage among the major firms and reduces the ability in the future for there to be excessive concentration in the financial sector, the officials said.
The proposal is consistent with the announcement last week to impose a fee on firms accepting assistance through the Troubled Asset Relief Program (TARP).
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