By Silla Brush - 03/04/10 12:50 AM EST
Details of how the Obama administration is considering clamping down on big financial firms under the “Volcker rule” circulated on Wednesday.
Under the rule, named for Paul Volcker, the Obama administration adviser and former Federal Reserve chairman, banks would not be allowed to engage in proprietary trading and would face new restrictions on their size. New capital restrictions would also apply to non-bank financial firms.
In a summary of the administration’s Volcker rule that circulated on Wednesday, financial firms would be prohibited from controlling more than 10 percent of the liabilities of the system. That is a broader limit than the current 10 percent cap on deposits.
The proposal would ban banks from purchasing, selling or trading in stocks, bonds, options commodities, derivatives and other instruments on their own behalf.
Banks would also be banned from investing in or sponsoring hedge funds or private equity funds and would be barred from lending or providing prime brokerage services to private funds that the banks advise.
Non-bank financial firms would face additional capital requirements and limits under the proposal.
The administration was expected to provide additional details and legislative text of the proposal.
The Volcker proposal was announced by the administration after the House passed overhaul legislation in December, and the Senate Banking Committee is deep in negotiations over crafting a bipartisan bill.
The House bill included discretion for federal regulators to limit the size and scope of financial firms, but it did not spell out the specific restrictions. The House provision was sponsored by Rep. Paul Kanjorski (D-Pa.) and gained significant support from consumer advocacy groups that have campaigned against big banks and Wall Street firms.
Senate Banking Committee Chairman Chris Dodd (D-Conn.) has expressed skepticism about the Volcker rule and whether to include it in the overhaul bill. Sen. Bob Corker (R-Tenn.), who is crafting legislation with Dodd, has said he does not expect the Volcker language to play a large part in negotiations over the broader bill.
Lobbyists for big financial firms have argued against size limitations, saying there is nothing inherent in the size of a firm that makes it riskier.