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Paul Volcker, left, with U.S. President Barack Obama. (KEVIN LAMARQUE/KEVIN LAMARQUE/REUTERS)
Paul Volcker, left, with U.S. President Barack Obama. (KEVIN LAMARQUE/KEVIN LAMARQUE/REUTERS)

Inside Obama's plan Add to ...

The presidential ambition

U.S. President Barack Obama proposes reining in the potential size, complexity and risk-taking capacity of the big U.S. banks through what amounts to an updated version of the 1933 Glass-Steagall legislation, which separated commercial and investment banking from starting during the depths of the Great Depression and lasting until the 1990s.

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The goal

Obama aims to reduce the risk of another economy-crushing financial crisis; avoid future bailouts of failed banks; stop the banks from using depositors' money for risky trading activities. Not to mention his desire to rebuild his sagging political fortunes and those of the Democratic party by tapping into public anger over the banks' renewed hefty trading profits and fat employment bonuses. In a recent survey, more than a third of Americans said their attitude toward the banks would affect how they vote in next fall's mid-term elections.

What it would mean

The proposed regulations would bar commercial banks from: trading in securities for their own profit; operating, sponsoring or investing in hedge funds or private equity vehicles; and trading complex financial derivatives such as credit default swaps without oversight. They would still be able to trade securities on behalf of clients. A cap on the market share of deposits and other liabilities held by any single bank would also be enforced.

The guiding light

The new plan bears the thumbprints of revered former Federal Reserve chairman Paul Volcker, whose views had been given short shrift by Obama advisers until the big Wall Street banks began throwing their weight around again.

"Banks have a service responsibility. … And they run the payments system. Those are very basic functions, which is the reason they are protected. But they should be limited in their more speculative activities," Mr. Volcker told The Globe and Mail last fall. "I have expressed a view that they shouldn't be running hedge funds, they shouldn't be running private equity funds and they shouldn't be in the commodities markets, and their trading activities should certainly be limited."

Who would be affected

The regulations are aimed at the surviving banking heavyweights, including JPMorgan Chase & Co., Citigroup, Bank of America, Goldman Sachs and Morgan Stanley. The latter two became commercial banking companies at the height of the crisis to obtain access to cheap loans from the Federal Reserve and would be affected only if they retained that status and took consumer deposits. The targeted banks are chief among the culprits blamed by the government for the financial collapse through their aggressive pursuit of short-term profits at the expense of the long-term health of the financial system.

Effect on foreign banks

If they operate commercial banks in the United States, they would face the same curbs on speculative trading and size.

Will it happen?

The plan requires congressional approval, a key stumbling block to other efforts at financial, fiscal and health-care reforms. But this is a midterm election year, and opponents of sweeping regulatory changes can hardly be seen siding with bankers in the midst of an economic slump. Nevertheless, parts of the proposal are sure to be watered down. And the banks, which fear that less-regulated global competitors will steal market share, will mount a strong counteroffensive. They have already argued that the proposal will boost risk and limit lending.

Assessment

Bank-bashing is always a smart political move. But the proposed regulations would probably not have prevented a housing bubble fuelled by cheap credit. And the very consolidation Mr. Obama is concerned about stemmed in part by Washington's move to salvage collapsing institutions such as Washington Mutual, Bear Stearns and Merrill Lynch. The banks themselves are imposing tighter risk standards, and several are already abandoning speculative trading. At the end of the day, bad lending practices cannot be legislated away.

 

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