Senators to seek wider "Volcker rule"

WASHINGTON (Reuters) - Two Senate Democrats said they will propose on Wednesday placing new limits on proprietary trading by banks and nonbank financial firms, widening the 'Volcker rule' backed by the White House.

Senators Jeff Merkley and Carl Levin said in a statement they will hold a news conference on legislation "to limit the types of high-risk bets, also known as proprietary trades, which contributed to the Wall Street collapse of 2008."

The Volcker rule, named after White House adviser Paul Volcker, is aimed at limiting risky trading by banks.

Merkley and Levin want to impose the rule but broaden its application to nonbank financial firms too.

Merkley, a first-term member of the Senate Banking Committee, told colleagues in a letter last month that he was drafting a bill to apply to both banks and nonbank firms that are large enough to be classified as critical to the financial system.

The move by Merkley and Levin underscores concern among some Senate Democrats with the drift in the banking committee. Negotiations toward compromise on financial regulation reforms have lasted for months now, but with no end result.

Senator Christopher Dodd, the Democrats' chief negotiator seeking a bipartisan deal, said he hopes to have revised legislation "in the coming few days."

With key senators still in disagreement on important parts of a comprehensive bill, Dodd told reporters at the Capitol:

"We're not there yet. There's no agreement ... I'm still hopeful, but I can tell you very candidly that it's also delicate. This thing could trip easily."

Tighter bank and capital market oversight is a top priority for President Barack Obama, who proposed a range of reforms in mid-2009. The U.S. House of Representatives approved a bill in December embracing most, if not all, of Obama's ideas.

Democratic Senator Robert Menendez told reporters on Tuesday that he hoped for bipartisan financial reform legislation by the end of the week.

Dodd, sounding more cautious, told reporters after a lunch with fellow Democrats, "There's a tremendous amount of anger in the country over what people feel the financial service sector did to the country."

'CHARGED ENVIRONMENT' DIFFICULT -DODD

Dodd continued, "I realize that's unfair to a lot of people in the financial services sector, but that's the general mood ... It's a very charged environment in which to try and craft legislation dealing with financial services."

The House bill, passed with no support from Republicans, calls for the most sweeping regulatory reforms since the 1930s, including clamping down on over-the-counter derivatives and boosting financial consumer protection.

The Senate has yet to act, with the result that regulation has changed little, almost a year and a half since the worst financial crisis in decades tipped the U.S. economy into a deep and prolonged recession, with global repercussions.

Obama complicated sensitive Senate negotiations in January by adding the proposed Volcker rule.

Merkley said last month he planned a bill that would still allow "reasonable market-making, underwriting and risk management activities ... as long as they are not used as a backdoor means to place bets on volatile and illiquid assets."

The Wall Street Journal reported that a bill expected soon from Dodd and Senator Bob Corker, a first-term banking committee Republican, will call for a $50 billion fund, levied against large financial firms, to pay for resolving problems at large firms that run into trouble.

Reuters reported a week ago that Dodd and Corker were considering creating such a fund for resolving troubled firms. Some of the money in it would be fronted by large firms, sources said on March 2.

The fund would be held by the Federal Deposit Insurance Corp. and invested in Treasury securities that banks could keep on their balance sheets, the sources told Reuters.

Dodd, who chairs the Senate Banking Committee, and his staff have been talking intensively for weeks with other lawmakers about possible compromises.

At some point, Dodd said he might determine that no bipartisan agreement is possible, meaning he would move a Democratic bill in the committee.

(Additional reporting by Rachelle Younglai and Corbett Daly; Editing by Kenneth Barry)