The Obama administration said on Tuesday it is still committed to the Volcker rule to ban risky trading by banks, although Congress looks increasingly unlikely to adopt the rule as proposed.
The White House's forceful support for the rule came after the Treasury Department said earlier in the day that it backed mandatory limits on banks trading for their own account.
President Barack Obama had originally framed the proposed Volcker rule on January 21 as an outright ban, which stunned markets and complicated extended negotiations in Congress over legislation to tighten bank and capital market regulation.
We're not walking away from and we're not watering down that proposal one bit, White House spokesman Robert Gibbs told reporters when asked about the outlook for the rule authored chiefly by White House economic adviser Paul Volcker.
We're not walking away from what the president outlined on the Volcker rule, Gibbs said at a briefing.
As he spoke, the U.S. Senate Banking Committee continued negotiating long-awaited regulatory reform legislation. Release of a bipartisan bill by two key lawmakers had been expected this week, but lobbyists said it may wait until next week.
The committee is considering including a watered-down version of the Volcker rule in the bill, which will also propose new rules to protect financial consumers, rein in derivatives markets and tackle the too big to fail problem.
Financial services industry lobbyists said senators may add language to their bill from a bill approved in December by the House of Representatives.
The House bill would allow, but not require, regulators to restrict proprietary trading at firms judged to pose a risk to the stability of the financial system. Regulators could also order firms out of the hedge fund business under the Democratic House bill, which got no votes of support from Republicans.
Obama's January proposal was tougher. He proposed that banks no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.
The Volcker rule could affect as much as 10 percent of net revenues at Goldman Sachs
In response to questions about the administration's commitment to the proposal, the Treasury Department on Tuesday restated its position that simply allowing regulators to act to curb banks' proprietary trading was not enough.
We believe that rather than merely authorize regulators to take action, we should impose mandatory limits on proprietary trading by banks and bank holding companies.
The statement, which was in keeping with testimony from a top Treasury official on February 2, also reiterated the Treasury's support for related restrictions on owning or sponsoring hedge funds or private equity funds, as well as on the concentration of liabilities in the financial system.
Former New York Federal Reserve official Ernest Patrikis, a foe of the Volcker rule, said the Treasury's language suggested a shift in the stance of the administration, which has still not released draft legislative language for the Volcker rule.
They realize they are off track and that the original proposal was misdirected, too strong and ill-advised, said Patrikis, a specialist in bank regulatory issues at the law firm White and Case in New York.
Senate Banking Committee members are considering giving regulators the power to impose limits on a bank's proprietary trading only if the regulator thinks the bank's activities threaten its safety and soundness. The rules would apply only to banks with assets over $50 billion, the sources said.
HOUSE BILL CLOSELY SIMILAR
Those parameters align closely with the House bill. One of its chief authors, Representative Paul Kanjorski, chairman of the House Capital Markets Subcommittee, told reporters on Tuesday he would support keeping the measured language in the House bill or the White House's proposal.
Either way, he said, I don't think that it hurts anybody except those who want to speculate very quickly. ... Let's be honest, some of these people just don't learn.
When your dog just keeps wetting the carpet, there's only one thing to do, you've got to whack him on the nose to let him know that's not what he's supposed to do. Maybe the regulators have to whack the banks a little bit to make them respond.
The U.S. government reported on Tuesday that the number of problem U.S. banks jumped 27 percent during the fourth quarter of 2009 to 702, the highest level since 1993.
At the same time, the New York State comptroller reported that bonuses on Wall Street rose 17 percent last year to $20.3 billion even as the industry faced a public backlash over pay.
Average taxable bonuses on Wall Street rose to $123,850 in 2009. Compensation at Goldman Sachs, JPMorgan Chase & Co
Separately, Senate Agriculture Committee Chairman Blanche Lincoln said on Tuesday the panel will unveil a draft bill in the next couple of weeks to crack down on over-the-counter derivatives, an area also addressed in the House-passed bill.
In another financial regulation issue, a senior Treasury official on Tuesday said at a conference that it is vital to set up a separate financial consumer watchdog agency.
Obama's proposed Consumer Financial Protection Agency is a major obstacle to bipartisan Senate agreement on reforms.
Michael Barr, the department's assistant secretary for financial institutions, said the Treasury was well aware that lobbyists were trying to slow progress or weaken reform.
(Additional reporting by Matt Spetalnick, Glenn Somerville, Rachelle Younglai, Caren Bohan, Karey Wutkowski and David Lawder, with Steve Eder and Jonathan Stempel in New York)
(Reporting by Kevin Drawbaugh; editing by Carol Bishopric)