Five Democratic senators today proposed to broadly limit proprietary trading, such as speculating in stocks commodities and derivatives, by the major banks that hold much of the federally-insured deposits of Americans.
The proposal, though, goes beyond the initial ‘Volcker rule’ concept by requiring “large, important nonbank” financial institutions to set aside capital and also follow strict limits on their speculative trading.
The so-called PROP (Protect our Recovery through Oversight of Proprietary) Trading Act “is intended to reduce high-risk speculation at our nation’s critical financial institutions, encouraging them instead to focus on lower-risk, client-oriented services,” the senators said in a statement.
It would bar banks and bank holding companies from “high risk speculation” involving any stock, bond, option, commodity, derivative, “or other security or financial instrument.”
“Risky trading by a handful of major firms contributed to the collapse of the some of the largest financial firms in the world, hundreds of billions of dollars in losses to taxpayers, and the devastation of the entire world economy,” said Sen. Carl Levin, D-Michigan.
The bill’s chief sponsors are Levin and Sen. Jeff Merkley, D-Oregon. They are joined in support by Senators Ted Kaufman, D-Delaware; Sherrod Brown, D-Ohio; and Jeanne Shaheen, D-New Hampshire.
The bill also bars those entities from investing in or sponsoring a hedge fund or private equity fund.
Since January, former Federal Reserve chairman Paul Volcker, a top economic advisor to President Obama, has been the chief proponent of separating big banks from their brokerage and investment divisions.
Volcker and Obama both contend that proprietary trading by banks helped fuel the financial crisis that was the prelude to the deepest U.S. recession in decades.
Volcker has stated that legislation is needed to protect the federally-insured deposits of big bank customers. There are “virtually insolvable conflicts of interest” that major financial institutions form that cannot be fixed by the “so-called Chinese walls between different divisions of an institution,” Volcker wrote last month in an opinion piece for The New York Times.
