WASHINGTON — Two Senate Democrats announced Wednesday they will introduce legislation that would restrict commercial banks' ability to engage in proprietary trading, the first step by lawmakers to implement the Obama administration's so-called "Volcker Rule."
Senators Carl Levin, D-Mich., and Jeff Merkley, D-Ore., told reporters that The Proprietary Trading Act would ban the practice by federally insured depository institutions and also forbid commercial banks from investing in private equity and hedge funds. The bill also would impose higher capital requirements and set strict quantitative standards for nonbank financial institutions that make trades.
When investments "explode, we do not want it to bring down our commercial banking system," said Merkley, a member of the Senate Banking Committee. "Any firm that is in the investment business should not have such a large investment house that they themselves create a systemic risk."
Merkley said that taxpayers should not be on the hook when insured banks make risky wagers, and that proprietary trading diverts capital that could be used to make loans to families and businesses.
Levin said that by the fall of 2008, financial firms had suffered an estimated $230 billion from losses in proprietary trading, and that "only a Wall Street trader would dismiss that number as immaterial."
Under the bill, regulators could conditionally exempt certain types of trading from the ban, including "risk-mitigating hedging" and "low-risk proprietary trades by banks," Levin said.
President Obama told lawmakers in January that he favored the inclusion of the rules into financial regulatory reform bill under negotiation in the Senate. The plan's chief proponent was Paul Volker, a White House economic advisor and former Federal Reserve Board chairman.
But the plan was met with mixed feelings from lawmakers intent on wrapping up financial reform. Sen. Richard Shelby, R-Ala., said the administration "airdropped" the proposal onto the Senate negations.
Volcker last month cautioned lawmakers that "if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."