Friday, January 22, 2010

Obama Teams With Volcker For New Financial Regulation

Obama introduced a new proposal for financial reform that would aim to limit risks and size of the nation's banks. The plan is championed by former Fed chairman Paul Volcker aims to prohibit certain risky trading behavior by commercial banks. See the following from Economist's View.

It looks like the political winds have shifted away from Tim Geithner/Larry Summers and toward Paul Volcker/Elizabeth Warren:

Obama to Propose Limits on Risks Taken by Banks, by Jackie Calmes and Louis Uchitelle, NYTimes: President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities...

The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker... The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading. ...

Mr. Volcker flew to Washington for the announcement on Thursday. His chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. ...[T]he concern is a new type of activity in which financial giants like Citigroup, Bank of America and JPMorgan Chase ... operate on two fronts. On the one hand, they are commercial banks, taking deposits, making standard loans and managing the nation’s payment system. On the other hand, they trade securities for their own accounts, a hugely profitable endeavor. This proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout.

Mr. Volcker ... has gradually lined up big-name support for restrictions on such trading. ... Under the new approach, commercial banks would no longer be allowed to engage in proprietary trading, using customers’ deposits and borrowed money to carry out these trades. ...
I want more details, these proposals don't exhaust the needed changes, and who knows what Congress will actually do -- I don't think we'll get anywhere near the amount of change we need when all is mostly said and little actually gets done -- but this is a move in the right direction. Too bad it didn't happen months ago. [dual posted]

This post has been republished from Mark Thoma's blog, Economist's View.

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