Top bank regulator Sheila Bair said on Friday that proposed proprietary trading limits are very positive, but said they would not have necessarily reined in risk-taking at the institutions that required massive bailouts.
President Barack Obama last week proposed banning financial institutions with commercial banking operations from engaging in proprietary trading operations that are for their own profit, not for their clients'.
The proposal is designed to prevent banks from using insured deposits to bankroll their own risky bets.
Bair, chairman of the Federal Deposit Insurance Corp, said the proposal is helpful, but said major commercial banks were not at the heart of the financial crisis that brought international markets to the brink of collapse.
As another piece of reform, it's very positive, but I think everybody acknowledges, though, that most of this did not occur inside insured depository institutions, Bair told reporters on the sidelines of an FDIC symposium on interest rate risk.
Lehman, AIG, Fannie and Freddie, Bear Stearns, they were not significant deposit takers, said Bair, an influential voice on financial reform who has the ear of key lawmakers.
Treasury Secretary Timothy Geithner has said that risky lending practices, not necessarily risky trading practices such as proprietary trading, were at the root of the crisis.
Geithner has aired some concerns about how effective the new trading ban would be in preventing future crises, according to financial industry sources.
Obama floated the trading limit last week along with another proposal that would limit the size of financial institutions through a cap on their share of nondeposit funding.
The White House proposals came amid a reinvigorated attack on Wall Street excesses designed to tap populist anger at the banks. Officials defended the timing of the proposals, saying they clarify some parts of a big financial reform proposal that the administration sent to Congress months ago.
That reform package has largely been passed in the House of Representatives. The Senate has been slower to act, seeking more bipartisan cooperation on the regulatory overhaul.
(Reporting by Karey Wutkowski, editing by Gerald E. McCormick and Robert MacMillan)