President Obama on Thursday proposed two new ways to restrict the size and activities of large commercial banks.
To reduce the risk posed by banks, the President said he would ask Congress to bar them from proprietary trading or from owning, investing in or sponsoring hedge funds or private equity funds.
"You can do proprietary trading or you can own a bank, but you can't do both," said a senior administration official who briefed reporters.
The administration also wants to limit future growth by capping an individual bank's share of the total market for nondeposit liabilities.
The official made clear these changes would not be applied retroactively.
"It's designed to restrain future growth," he said. "It's not about reducing liabilities within the share the existing structure."
He likened the new cap to one that currently prevents any bank from doing acquisitions once it controls more than 10% of the nation's deposits. The official said the cap on nondeposit liabilities would not necessarily be set at 10%. He said the administration would work with Congress and regulators to determine the proper cut-off.
Asked why the administration was embracing these ideas today, the official said they are in line with the regulatory reform plan the administration outlined last summer. He said they echo an amendment to the reform bill approved by the House. That amendment, by Rep. Paul Kanjorski, D-Pa., would give federal regulators the flexibility to limit a bank's activities if it posed a threat to the financial system. The official said the administration is merely proposing that this authority be converted to a requirement that regulators act.
"It is moving what is a discretion in [Rep. Barney] Frank's bill to requiring regulators to act," the official said.
The official said the House bill would need to be revised. Regulatory reform has not yet passed the Senate.
The official insisted the administration is not intent on restoring the Glass-Steagall Act, the wall between commercial and investment banking that was removed in 1999.
"It's not about investment banks and commercial banks and not about returning to days of the past," he said.
Paul Volcker, the former Federal Reserve Board chairman who is now a member of Obama's economic team, has been advocating limits on bank size for months. Until today, no one else in the administration agreed with him. In fact, Treasury Secretary Tim Geithner has said size is not the problem, and that systemic risks can be controlled through tighter oversight.
But the official said the President was persuaded to make this move in part because banks' actions over the past six months. He did not cite specific actions taken by banks, but later President Obama elaborated.
"My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low and cannot refund taxpayers for the bailout," the President said. "It is exactly this kind of irresponsibility that makes clear reform is necessary."