WASHINGTON, Feb 12 (Reuters) - A member of the U.S. Senate Banking Committee said on Friday he is writing legislation that would apply more widely a White House proposal to limit risky investing, extending the reach to nonbank financial institutions as well as to banks.
Jeff Merkley, a a first-term Democrat from Oregon, said in a letter to colleagues that his bill would apply to nonbank financial institutions large enough to be “systemically critical.”
The bill would broaden a proposal made last month by the White House known as the Volcker rule, because it was backed by Paul Volcker, an economics adviser to President Barack Obama and a former chairman of the U.S. Federal Reserve.
The Merkley bill would prohibit these firms “from owning or operating hedge funds and private equity funds and from engaging in proprietary trading,” or using their own capital to pursue above-market returns unrelated to customer needs.
Merkley said the limits would curb “taxpayer-backed gambling” of the sort pursued by major investment and commercial banks in the run-up to the financial crisis of 2008 and 2009 that shook markets worldwide, leaving many institutions backed by taxpayers.
“Reasonable market-making, underwriting and risk management activities should still be permitted, as long as they are not used as a backdoor means to place bets on volatile and illiquid assets,” Merkley said in the letter.
Obama stunned financial markets in late January by calling for new limits on banks’ ability to do proprietary trading, to be engaged in the hedge fund and private equity businesses, and to limit their future growth.
Volcker said last week in a Senate hearing that the proposed changes, on their own, would not have prevented the financial crisis, but would help prevent the next one. He warned that if Congress failed to curb risky investing by big banks, his soul would haunt lawmakers when the next crisis hits.
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said he supports the Obama proposals, but it would be difficult to add them to financial reform legislation under development for more than a year in Congress.
Banking committee members are trying to negotiate a bipartisan regulatory reform to avoid a repeat of the crisis that caused the worst U.S. recession in decades.
Deep divisions remain among committee members over issues such as managing systemic risk, bank supervision and consumer protection. Obama’s latest proposals complicated the talks.
The House of Representatives approved a bill in December that called for the biggest regulatory changes since the Great Depression. The Volcker rule was not included. (Editing by Leslie Adler)