On January 21, President Barack Obama called for new restrictions on the size and activities of U.S. banks. Included among the proposed restrictions is the so-called “Volcker Rule,” named for Paul Volcker, former Chairman of the Federal Reserve Board and current chairman of the President’s Economic Recovery Advisory Board. The Volcker Rule would prohibit a bank or bank holding company from owning, investing in, or sponsoring hedge funds or private equity funds, or engaging in proprietary trading operations for its own profit unrelated to serving its customers. President Obama stated that “firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.” In addition, the President also proposed to limit the consolidation of the financial sector by placing broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits. The President chastised the financial industry further for “an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common sense rules of the road that would protect our economy and the American people.” The administration said it wants to include these new restrictions in the pending comprehensive financial reform legislation and exhorted members of Congress of both parties to adopt financial reform.
Reportedly, the proposed limit on the consolidation of the financial sector reflects a desire by the administration to expand the coverage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Banking Act). The Interstate Banking Act essentially bars a bank from acquiring another bank in an interstate transaction if the resulting bank on a pro forma basis would hold more than 10% of the nation’s insured deposits. There are some indications that the administration may also try to expand the Interstate Banking Act to cover other types of funding and put a limit on the share of assets that any one banking organization could hold.
The Volcker Rule and the limit on the consolidation of the financial sector advocated by the President would need to be passed into law by Congress. Until such passage, it is unclear whether the U.S. Treasury Department and the other banking agencies would endeavor to put some or all of these restrictions into place via regulatory fiat.