Obama Wants to Restrict Bank Size and Scope

President Barack Obama proposed new restrictions Thursday on the size and scope of financial institutions to limit their ability to engage in risky trading practices.

“We should no longer allow banks to stray too far from their central mission of serving their customers,” said Obama. “In recent years, too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward. And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.”

Obama was joined by former Federal Reserve Chairman Paul Volcker, House Financial Services Committee Chairman Barney Frank, D-Mass., and Senate Banking Committee Chairman Christopher Dodd, D-Conn., in the announcement.

Obama and his economic team plan to work with Congress on legislation that would prevent banks and any financial institution that contains a bank from owning, investing in or sponsoring a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

Obama also announced a new proposal to limit the consolidation of the financial sector. The proposal would place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

In December, the House passed sweeping financial regulatory reform legislation that contained provisions authorizing regulators to restrict or prohibit large firms from engaging in excessively risky activities. Dodd’s committee is currently working on crafting its own version of the legislation, and Obama plans to work closely with him and others to craft the package.

Last week, Obama also proposed a Financial Crisis Responsibility Fee that would be levied on large financial firms and banks (see Obama Proposes Financial Crisis Responsibility Fee). That proposal is heavily opposed by many in the financial services industry. The industry is expected to lobby against Obama’s latest proposal as well.

“The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs,” said Steve Bartlett, president and CEO of the Financial Services Roundtable, which represents 100 of the largest integrated financial services companies.