White House Offers Bill to Restrict Big Banks’ Actions

March 8th, 2010 by narcompany

This proposed 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.

Additionally, the legislation would also ban any bank from acquiring another bank if the merged company would have more than 10% 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 new should not take undue risks.

Senators said the rule would not have prevented the financial crisis or saved companies like Bear Sterns, Lehman Brothers, and the American International Group. They said the idea, as outlined by President Obama, was vague and difficult to enforce. Representatives from Goldman Sachs and JP Morgan 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.

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 the customer.  The legislation would also seek to restrict proprietary trading by non bank 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 profit financial institutions from assuming, by acquisition, more than 10% 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.

“The existing cap on deposit concentrations has become less effective as large banking firms have increasingly relied on other sources of funding and has given these firms an incentive to shift towards riskier sources of funding,” the Treasury said in a statement.

The Treasury Secretary, Timothy F. Geithner, and a senior White House Advisor, 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 these rules.

March 4, 2010    The New York Times Dealbook, Edited by Andrew Ross Sorkin

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