One of President Barack Obama's top advisers argued on Tuesday to impose new limits on commercial banking activity, noting strong conflicts of interest in financial institutions' proprietary or private investment activity.

Paul Volker, the former Chairman of the Federal Reserve, appeared before the Senate Committee on Banking to discuss proposals by President Barack Obama to reform the financial services industry.

What we can do, what we should do, is recognize that curbing the proprietary interests of commercial banks is in the interest of fair and open competition as well as protecting the provision of essential financial services, Volcker said.

Volker's comments come as U.S. lawmakers are considering the new restrictions.

The Chairman of the committee, Sen. Chris Dodd (D-CT), said he strongly supported the President's proposals to limit Wall Street's activities.

These proposals were borne out of fear that a failure to act would leave us vulnerable to another crisis, and of frustration at the refusal of financial firms to rein in some of these more reckless behaviors, Dodd said in prepared remarks released today.

Volcker also agreed with previous calls for creating a new government authority to wind down large failing non-bank financial institutions. The government would be allowed to intervene in major financial institutions on the brink of failure, arranging for an orderly liquidation or merger.

In other words, euthanasia not a rescue, he said.

While there have been concerns about what proprietary trading is, Volker says bankers know very well what that means and implies.

Hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own, without the subsidies implied by public support for depository institutions, Volker said.

Commercial banks would have a wide array of areas to do business even without proprietary trading, he said, listing various businesses.

Quite a list. More than enough, I submit to you, to provide the base for strong, competitive - and profitable - commercial banking organizations, able to stand on their own feet domestically and internationally in fair times and foul, he added.