WASHINGTON — Although the Dodd-Frank Act ostensibly allows regulators to eliminate "too big to fail," two well-known critics of the concept said Wednesday the government's response should go further.

Testifying before a Senate committee, former Federal Reserve Board Chairman Paul Volcker and current Federal Deposit Insurance Corp. board member Thomas Hoenig touched on topics ranging from implementing the so-called "Volcker Rule" to the FDIC's new authority to seize failing giants to the structural characteristics of systemically risky firms.

Volcker acknowledged concerns that, while the reform law's proprietary trading ban bearing his name will help, the regulators' pending proposals to implement it appear overly complex. He also agreed the agencies' final rule should not ban so-called market-making activities, and dismissed concerns that regulators would have to track every trade to determine if proprietary trading had occurred.

"You don't have to trace every transaction in real time. I don't think that's the purpose of the regulation," Volcker said at a hearing before the Senate Banking Committee's subcommittee on financial institutions. "All of these banks have daily reports on their trading activity anyway. … These trading desks are all controlled. You know in general what the characteristics are of proprietary trading. You can look at those reports … and … if you see characteristics in those trading patterns that suggest proprietary trading, then you go look at them."

Responding to questions from Sen. Bob Corker, R-Tenn., Volcker agreed that he did not intend for the ban to include market-making activities, and he said market-making tools that bring profits to a financial institution are legitimate.

"It's nonsense, frankly," he said. "You can certainly make money."

The hearing came as Sen. Sherrod Brown, D-Ohio, who chairs the subcommittee, reintroduced legislation aimed at limiting the size of large financial institutions.

The bill, which is similar to an amendment Brown tried unsuccessfully to add to Dodd-Frank, would aim to close loopholes in existing caps on an institution's allowable share of the nation's deposits and liabilities, limit non-deposit liabilities to 2% of gross domestic product for banks, and 3% for nonbanks; and set a formal 10% leverage limit for large bank holding companies and certain nonbank financial institutions.

"Making Wall Street banks smaller and simpler will benefit taxpayers by preventing future bailouts," Brown, D-Ohio, said at a hearing on limiting federal support for big banks before the Senate Banking subcommittee that he chairs. "It will improve pricing and service, as outsized market power reduces competition and inflates prices for clients and consumers."

Both Volcker and Hoenig, who previously was head of the Federal Reserve Bank of Kansas City, said while Dodd-Frank makes progress in removing the perception that institutions are too big to fail, the law's devices rely on the market believing policymakers will in fact use their new powers to close a failing institution in the next crisis.

Volcker said regulators should address the market's "skepticism" that the FDIC's new resolution powers will one day be exercised.

"I think that skepticism is overdone but it has to be dealt with," he said.

Hoenig, who was only recently confirmed to his FDIC seat and said he was speaking on his own behalf rather than for his new agency, said the political courage of those in charge during the next crisis will be a significant factor in the resolution mechanism's success.

"Dodd Frank does give us the mechanism to do that," he said of the FDIC's new ability to close a systemically important nonbank financial institution. The question is whether, he added, "we will have the will to do that."

Hoenig presented the committee with a paper he completed last year while at the Kansas City Fed that argues in favor of separating out a commercial bank's higher-risk activities — "beyond their core services of loans and deposits" — if those activities make the institution so complex that it threatens the market.

He said subsidies afforded to systemically important financial firms allowed them to expand high risk activities and take on a greater share of the nation's wealth compared to other industries.

"Those are the kinds of things that contributed to their very rapid growth. … You didn't have these same subsidies — and necessarily so — in these other industries," Hoenig said.

Hoenig called the FDIC's resolution tools "extremely important." But he said addressing the structural characteristics of the nation's largest banks would make the powers created by the reform law more effective.

"Then Dodd-Frank becomes more powerful in terms of resolving institutions that fail in the next crisis," he said.

Volcker said the "effectiveness" of some the law's biggest pieces relies on the rule-writing process, and some key areas of the financial system needing reform have still not been addressed. Those include reforming the nation's system of housing finance, improving coordination between different domestic regulatory regimes and changes to money-market mutual funds.

"The residential mortgage market today remains almost completely dependent on government support," he said in his prepared testimony. "It will be a matter of years before a healthy, privately supported market can be developed. But it is important that planning proceed now on the assumption that government-sponsored enterprises will no longer be a part of the structure of the market."

Meanwhile, Volcker said money-market funds are "truly hidden in the shadows of banking markets."

"Money market mutual funds are another example of moral hazard, and seem to me more amenable to structural change," he said in his prepared remarks.

But despite growing calls for structural changes at large institutions, and the specifics of Brown's bill, analysts remain skeptical such legislation could be enacted.

Jaret Seiberg, a senior policy analyst for Guggenheim Securities' Washington Research Group, said while the "headline risk" of Wednesday's hearing could be high, the "real risk" of proposals to reduce the size of the big banks was low.

"We believe there is a 20% risk that Congress and the regulators in the next few years will move to reduce the size of the biggest banks by either breaking them up or raising capital requirements even higher," Seiberg wrote in a research note Wednesday. "While this risk is low, it is much higher than market expectations as we believe most investors see little threat here."

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