Volcker welcomes Senate Volcker rule bill

Chairman of the President's Economic Recovery Advisory Board Paul Volcker testifies before the U.S. Senate Banking, Housing, and Urban Affairs Committee on Capitol Hill in Washington, February 2, 2010.

WASHINGTON (Reuters) - White House economic adviser Paul Volcker told Reuters on Wednesday he was encouraged by support in the Senate for the 'Volcker rule' proposed in January to limit proprietary trading by banks.

Legislation that would write into law and widen the 'Volcker rule' was unveiled in the Senate on Wednesday by senators Jeff Merkley and Carl Levin, both Democrats, offering new backing for a proposal first unveiled by the White House in January.

"I welcome their support. I think it reinforces what the administration is doing and proposing," said Volcker, former chairman of the Federal Reserve, in an interview.

The rule put forward by President Barack Obama and Volcker stunned markets and immediately encountered fierce resistance from the banking industry and Wall Street.

Comprehensive financial reform legislation is still being developed in the Senate Banking Committee. That legislation is unlikely to include the 'Volcker rule,' at least not in its original form, said Senate aides, lobbyists and lawmakers.

As proposed, the rule would ban banks which enjoy federal insurance protection from buying and selling investments for their accounts unrelated to customers' needs. It would also get banks out of the hedge fund and private equity businesses.

The draft legislation from the Senate is expected to be published, possibly this week, and is expected to include language allowing regulators to order changes at large, distressed firms that could extend to halting proprietary trading and hedge fund operations.

But that would represent a watering down of the original Volcker rule, which Merkley and Levin favor.

They said they want to widen the rule to include large nonbank financial institutions, as well as banks. They said they were joined in backing their bill by Democratic senators Ted Kaufman, Sherrod Brown and Jeanne Shaheen.

As for wider support for the rule, Volcker said, "There are certainly others that I would expect would support it."

He said he "has no sense at all" that the White House's commitment to the rule has changed since it was unveiled.

"The president has expressed it as a priority and I believe that is the case," Volcker said.

(Reporting by Kevin Drawbaugh)