White House economics adviser Paul Volcker will urge Congress on Tuesday to rein in risky investing by big banks to help prevent them becoming too big to fail, according to testimony obtained by Reuters.
The former Federal Reserve chairman, whose star is rising in the Obama administration as it pushes harder for Wall Street reform, will face questions at a Senate hearing from lawmakers seeking details on last month's proposed Volcker rule.
President Barack Obama stunned financial markets in late January by calling for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.
Since then analysts have speculated widely about exactly what sort of activities would be off-limits if Congress adds the proposal, formulated by Volcker, to a sweeping package of financial regulatory changes still being debated.
Volcker, a monetary policy sage whose tight-money regime broke the back of stagflation when he was Fed chairman in the early 1980s, will tell the Senate Banking Committee that there is little reason for uncertainty about what he is proposing.
Every banker I speak with knows very well what 'proprietary trading' means and implies, Volcker will tell the committee, according to the written testimony.
My understanding is that only a handful of large commercial banks -- maybe four or five in the United States and perhaps a couple of dozen worldwide -- are now engaged in this activity in volume, he will say.
In the past, they have sometimes explicitly labeled a trading affiliate or division as 'proprietary,' with the connotation that the activity is, or should be, insulated from customer relations.
The bank has been in acquisition talks over RBS Sempra, co-owned now by Sempra and Royal Bank of Scotland
HEDGE FUND TIES TARGETED
In addition, Volcker wants banks to sever their ties to hedge funds and private equity ventures.
Hedge funds, private equity funds, and trading activities unrelated to customer needs ... should stand on their own, without the subsidies implied by public support for depository institutions, he will say at the afternoon hearing.
Left largely unaddressed in the testimony is a third proposal -- limiting the future growth of large financial institutions. Obama in January called for a new market share cap for banks that takes into account not only their deposits, as currently limited, but also non-deposit funding.
In addition, no explicit mention is made in the testimony of an idea associated with Volcker that he has lately been soft-pedaling -- reimposing the 1930s-era Glass-Steagall laws that required separation of commercial and investment banking.
The laws were largely repealed in 1999, helping to usher in a powerful wave of consolidation in financial services that some critics blame in part for the 2008 financial crisis. Some lawmakers have called for reimposing Glass-Steagall.
We expect Volcker and others at the hearing to concede that bringing back Glass-Steagall is not viable, said Jaret Seiberg, financial services policy analyst at investment advisory firm Concept Capital.
Volcker, who has become a global crusader for stronger financial oversight in recent years, will tell lawmakers that international consensus on appropriate actions to restrict commercial banks' activities is an attainable goal.
He will say there are strong conflicts of interest inherent in participation by commercial banks in proprietary or private investment activity.
I am not so naive as to think that all potential conflicts can or should be expunged from banking or other businesses, Volcker said in his prepared remarks.
But neither am I so naive as to think that, even with the best efforts of boards and management, so-called Chinese walls can remain impermeable against the pressures to seek maximum profit and personal remuneration, he said.
Taken on board as an adviser early on by Obama, Volcker initially seemed not to having much impact in the administration. But that has changed since the Democrats lost a special Senate election in Massachusetts and Obama moved to a more populist stance, proposing new bank restrictions.
(Additional reporting by Luke Pachymuthu in Dubai and Steve Slater in London; Editing by Andrea Ricci)