US President Barack Obama has proposed stricter limits on financial institutions' risk-taking in a new move that sent bank shares tumbling
Obama laid out rules to prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.
He also called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.
'We should no longer allow banks to stray too far from their central mission of serving their customers,' Obama said.
'Too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward,' he added.
The rules, which must be agreed by Congress, would also bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.
Proprietary trading involves a firm making bets on financial markets with its own money, rather than executing a trade for a client. These expert trading operations, which can bet on stocks and other financial instruments to rise or fall, have been enormously profitable for the banks but also increase market volatility.
The White House blames the practice for helping to nearly bring down the US financial system in 2008. Obama's move is the latest in a series to crack down on banks.
Bank shares slid and the dollar fell against other currencies after the announcement. JPMorgan Chase fell 5.8%, Citigroup fell 6.36% and Bank of America fell 7% while Goldman was down 5.5% despite posting strong earnings earlier today.
Obama targeted banks for taking big risks while assuming taxpayers would bail them out if they failed.
'When banks benefit from the safety net that taxpayers provide, which includes lower-cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit,' Obama said.
'That is especially true when this kind of trading often puts banks in direct conflict with their customers' interests,' he said.
Before the announcement, Obama met with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favours putting curbs on big financial firms to limit their ability to do harm.
The US House of Representatives approved a sweeping financial regulation reform bill on December 11. The House bill contains a provision that empowers regulators to restrict proprietary trading by financial firms subjected to stricter oversight because they are judged to pose a risk to the stability of the financial system.
Meanwhile, the White House said this evening that President Barack Obama's proposed limits on bank risk-taking were not designed to be punitive but to ensure trust in the financial system.
White House economic adviser Austan Goolsbee, speaking after Obama's announcement, said the measures were meant to get banks back to their core function of serving clients rather than taking excess risk.
He said the proposals were aimed at ending the concept that some financial companies are 'too big to fail' and to show that when such firms 'mess up, they die'.
