Bill Proposed to Limit Risk Taking by Banks

In the aftermath of the financial crisis, the Obama administration has been trying to bring in measures to avoid a similar crisis in future. In another such effort, the administration has proposed a bill that would reduce risk taking by large financial companies.

The bill aims to ban financial companies from involving in risky trades for the benefit of the company itself. This kind of trading, known as proprietary trading, is done to make profits for the bank and not for its customers. The bill would also prevent banks from investing in hedge funds and private equity funds. However, all these rules would apply only on companies that use federally insured deposits.

Brainchild of Paul Volcker, the former chairman of the Federal Reserve, the bill would also ban financial companies from acquiring or merging with another company if the merged entity would end up having 10% of the total liabilities of the whole financial system. This rule intends to prevent the financial risk from being concentrated in a single company so that we don’t have banks that are ‘too big to fail’. Similar restrictions already exist, but they are seen as largely ineffective. The bill proposes to replace these restrictions with stronger ones that are more relevant in the current market reality.

Many prominent figures, including George Soros, the hugely successful investor, have endorsed the bill. But it faces a lot of opposition in the Senate. The critics of the bill say that it is vague and would not have done much to prevent the financial crisis.

Among the large banks that are likely to be affected by the bill are JPMorgan Chase and Goldman Sachs. Both banks claim that there are other better alternatives available to limit risk taking without having to ban proprietary trading. Critics also say that financial companies would simply move their trading arms to other countries to bypass such laws.

Some financial experts believe that the bill is ambiguous and would be very difficult to enforce. There is also concern that it is now too late to pass such legislation and that something on these lines should have been the first step in response to the financial crisis, not among the last.

The Obama administration, especially the Treasury secretary, Timothy Geithner, have been accused of doing too little too late to prevent another financial disaster. The latest bill seems to fit that pattern.