Obama to propose new limits on large banks' size and investments, official says
Thursday, January 21, 2010
President Obama plans to propose new limits Thursday on the size and investments of large banks, a senior administration official said, as the White House intensifies its push to reframe its financial reform agenda as an effort to rein in the companies widely blamed for causing the economic crisis.
Although the details of the new proposal could not be learned, the president plans to announce a series of measures aimed at limiting the risks that large banks can take, according to the official, who spoke before the formal announcement on condition of anonymity.
The White House wants Congress to incorporate the proposal into reform legislation being considered by the Senate, the official said.
The president has mounted a rhetorical assault on the nation's largest banks in recent weeks to build political support for changes that officials regard as necessary to improve the stability of the financial system. Obama called this month for a new tax on the largest banks that, in addition to recouping the cost for federal bailout programs, also is designed to increase the cost of making risky investments.
That proposal, in combination with others put forward by the White House, is designed to impede, and reverse, the growth of the large firms that have come to dominate American banking during an era of consolidation that peaked during the financial crisis.
The new proposal could include limits on the use of insured deposits to fund financial speculation, according to several sources familiar with the matter. By protecting depositors, the government allows banks to collect money more cheaply, effectively subsidizing the industry.
Investments in hedge funds might be among the administration's specific targets, two industry lobbyists said.
Obama also might propose limits on trading that banks conduct with their money for their benefit, rather than for the benefit of clients, according to the lobbyists and congressional aides. All spoke on condition of anonymity ahead of the speech.
The president plans to meet before the speech with Paul Volcker, chairman of his Presidential Economic Recovery Advisory Board. Volcker, who up to this point has not been intimately involved in shaping the administration's core regulatory reform proposals, has said in public speeches that the government should impose stronger limits on the growth and risk-taking of large banks.
Such restrictions would not necessarily re-create the barriers erected after the Great Depression that strictly separated retail banking, in which lending is funded by deposits, from investment banking, in which banks help clients gather money from investors. But the new approach does echo those measures, which sought to separate core activities then considered crucial to the broader economy from more speculative activities judged unworthy of federal support.
Staff writer Brady Dennis contributed to this report.