"Glass-Steagall lite Barack Obama proposes limiting the activities of big banks."

[Clio the Leo]

Glass-Steagall lite - Barack Obama proposes limiting the activities of big banks.

<snip>

Though not a full return to Glass-Steagall, the law that separated commercial banking and investment banking in the wake of the Great Depression (and was repealed in 1999), it is at least a return to its “spirit”, as one official put it. Reflecting the possible dent it could put in profitability, bank shares tumbled, pulling stockmarkets down sharply around the world.

The first half of the plan concerns restrictions on the scope of activities. Banks that have insured deposits, and thus access to emergency funds from the central bank, would not be allowed to own or invest in private equity or hedge funds. Nor would they be able to engage in “proprietary” trading—punting their own capital—though they could continue to offer investment banking for clients, such as underwriting securities, making markets and advising on mergers.

The second part focuses on size. Banks already face a 10% cap on national market share of deposits. This would be updated to include other liabilities, namely wholesale funding. The aim is to limit concentration, which has increased greatly over the past 20 years, accelerating during the crisis as healthy banks bought sick ones. The four largest banks now hold more than half of the industry’s assets.

These proposals will be wrapped into a broader set of reforms that is grinding its way through Congress. A bill passed by the House of Representatives, but not yet taken up by the Senate, gives regulators the right to limit the scope and scale of firms that pose a “grave” threat to stability. The new plan goes further, requiring them to do so. It is also more radical than the increased capital charges for trading assets proposed by the Basel Committee of international bank supervisors.

The administration had until now seemed content to shackle the banks with tougher regulation, including higher capital ratios, rather than breaking them up or limiting what they could do. But it has warmed to the thinking of Paul Volcker, a former Federal Reserve chairman and Obama adviser, who has long advocated more dramatic measures—indeed, Mr Obama dubbed the latest reforms “the Volcker rule”. Intriguingly, the rethink was prompted as much by banks’ behaviour over the past year as by their pre-crisis sins. In explaining their rationale, officials pointed to the fat profits some banks made in capital markets in 2009 while benefiting from state guarantees. On the same day as the plan’s unveiling, Goldman Sachs reported better than expected results, thanks largely to outsized investment-banking fees.

more
http://www.economist.com/opinion/displayStory.cfm?story_id=15374543&source=features_box1

[still_one]

1. This is a good thing, and you know it is good because both wall street and the banks are upset

They talk as though this risk had nothing to do with the problems

The big question is will Congress pull its head out of its ass and do the right thing FOR THE PEOPLE

[Jennicut]

2. I am watching the continuing funeral (from yesterday) on CNBC

It is utterly hilarious how worried about this they are.

[swilton]

3. I'll believe it when I see it

How interesting that this is announced in the aftermath of the Mass. debacle....Obama is great on eloquence and short on action. Furthermore, any legislation would have to go through the wickets of the house and senate....by then who knows what the legislation would look like.

[ShortnFiery]

4. +1

I don't believe TALK anymore.

Talk is CHEAP President Obama. Show us ACTION? :(