Obama Proposes New Banking Regulations

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President Obama called Thursday for new rules limiting the size and scope of Wall Street's biggest banks. The proposal would create new regulations on what banks can do with their own capital. Administration officials say they want to place firewalls between different divisions of financial companies so federally insured deposits can't be used to subsidize speculative trading.

MADELEINE BRAND, host:

From NPR News, this is ALL THINGS CONSIDERED. Im Madeleine Brand in California.

MELISSA BLOCK, host:

And Im Melissa Block in Washington.

President Obama issued fighting words today with a proposal aimed at banks that have been called too big to fail. Mr. Obama proposed new rules to limit the size of banks and to curb risky activities as part of his vision for a financial regulatory reform.

President BARACK OBAMA: My message to members of Congress of both parties is that we have to get this done. And my message to leaders of the financial industry is to work with us and not against us on needed reforms.

BLOCK: Bank stocks tumbled after the presidents announcement.

As NPRs John Ydstie explains, the new rules are controversial because they could significantly reduce profits at some big banks.

JOHN YDSTIE: The presidents new proposals aim to put more distance between the two arms of banking, taking in deposits as commercial banks do and making risky bets as investment banks do. The rules would prohibit commercial banks and companies that own them, like Goldman Sachs and Citigroup, from owning hedge funds and private equity firms. And announcing the rules at the White House today, President Obama took on the tone of a populist reform politician.

Pres. OBAMA: We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins, but taxpayers foot the bill if the bank loses.

YDSTIE: Since trading for their own benefit, or proprietary trading, as its called, can generate big profits, the new rules may force some firms to choose between owning deposit-taking commercial banks and doing lucrative but risky proprietary trading. The president suggested thats okay.

Pres. OBAMA: If financial firms want to trade for profit, thats something theyre free to do. Indeed doing so responsibly is a good thing for the market and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.

YDSTIE: In addition to eliminating some of the risky activities of banks and their holding companies, President Obama wants to limit the overall size of banks too.

Pres. OBAMA: The American people will not be served by a financial system that comprises just a few massive firms. Thats not good for consumers, its not good for the economy.

YDSTIE: Bank size is already restricted in some ways. For instance, any one bank can hold no more than 10 percent of all the insured deposits in the country. But banks get funding in other ways through uninsured deposits and issuing commercial paper, for instance. The president wants to limit the amount of that kind of funding a single bank can have as well. The big financial institutions and their investors did not respond well to the news, shares in the big banks like Goldman Sachs, J.P. Morgan Chase and Bank of America fell.

Scott Talbott, an industry lobbyist at the Financial Services Roundtable, said if the president wants to reduce risk, taking away the big firms ability to trade for their own accounts wont be helpful.

Mr. SCOTT TALBOTT (Lobbyist, Financial Services Roundtable): Its a tool used to manage risk. And so without that tool in our arsenal, makes it harder, if not impossible, to manage certain risks and thereby decrease them.

YDSTIE: Mr. Obamas proposal today is a victory for presidential adviser Paul Volcker, the former Federal Reserve chairman. Hes been advocating a clearer separation of investment and commercial banking activities. But the Reuters News Service reported today that Treasury Secretary Timothy Geithner thinks the move is putting politics ahead of good economic policy.

John Ydstie, NPR News, Washington.

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