WASHINGTON — Two senators proposed on Wednesday legislation that would reinstate the firewall between commercial and investment banks, and give financial firms a year to break themselves up.

If enacted, the bill would mean that J.P. Morgan Chase Co. would have to give up the Bear Stearns trading operations it acquired earlier in the year, or separate its Chase retail banking arm.

Bank of America Corp. and Merrill Lynch would have to split up, while Citigroup Inc. would have to shed its various commercial banking operations.

Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) said the legislation is a reaction to the continued difficulties small businesses face in accessing the credit markets.

They said that American people who continue to suffer as a result of the economic downturn are furious as they see banks taking risks again in a bid to drive up profits.

Their legislation would seek to reimpose the divide between commercial and investment banking operations that was imposed in the wake of the Great Depression, and remained in place for 60 years until Congress acted to remove it a decade ago.

"We need to rebuild the wall of Glass-Steagall so banks will stop diverting resources to Wall Street speculation and get back to more business lending to main street," Cantwell said.

Glass-Steagall is the name of the Depression-era legislation, so called after the lawmakers who sponsored it.

"I want to ensure that never again we stick the American taxpayer with another $700 billion or even larger tab to bail out the financial industry," McCain said, referring to the Treasury bailout program of financial firms.

McCain said he isn't opposed to investment banks taking risks to pursue greater returns, but he doesn't believe these risks should be taken using retail banking depositors' money.

The attempts to reinstate the banking separation rules are unlikely to receive much support from leadership in either the House or the Senate or from the Obama administration. Had Democratic leadership in either chamber wanted to include language enforcing a separation of commercial from investment banking activities, they would have included such a measure in the wide-ranging regulatory overhaul bills making their way through Congress. The House approved its version of the legislation last week, while the Senate is expected to move forward with its bill early in 2010.

The lawmakers said that if Sen. Christopher Dodd (D., Conn.) doesn't incorporate their measure in his effort to overhaul regulation of the financial sector, they would seek to introduce the bill as an amendment when Dodd's effort comes to the floor of the Senate.

Cantwell said she doesn't believe that Dodd's proposal to give the federal government the power to unwind "too big to fail" financial firms that pose a risk to the financial system goes far enough to place checks on large banks' activities.

"We don't think they are addressing the fundamental part of this problem and that is the needed separation between commercial and investment banking," McCain said.

Rep. Maurice Hinchey (D., N.Y.) plans to introduce similar legislation in the House later Wednesday, a spokesman said. He tried to add it as an amendment to the House's financial regulatory overhaul legislation last week, but wasn't permitted to do so by the Democratic leadership.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.