May 7, 2010 12:59 am

Senators say volatility makes case for regulation

US senators advocating stricter limits on banks and tougher regulation of markets used Thursday’s volatility to demand more sweeping reforms as the financial regulatory bill edged towards a vote.

Ted Kaufman, the Democratic senator from Delaware, said the sell-off in the S&P 500 supported his case that high-speed trading needed more regulation and banks needed more limits on their activities and size.

He told the Financial Times that he would try to introduce a proposal requiring the Securities and Exchange Commission to report on high frequency trading “much sooner” than they were due to.

“Until today,” he said, he was struggling to get traction on the issue with other senators.

In addition to new proposals directly aimed at high-frequency trading, Mr Kaufman said Congress should support his amendment to put size caps on deposit-taking banks. “Banks should not be involved in high-risk/high-return proposals . . . There’s a potential for a meltdown and [then] you’ve got a commercial bank in the crosshairs.”

Mr Kaufman’s pet cause appeared to be gathering ground in Congress as the market panic filtered through to the Senate floor. “I have become a believer,” said Mark Warner, a Democrat from Virginia. “Everything in my gut says he’s on to something here.

“I think there was a warning sign shot across the bow today,” Mr Warner added. “As we deal with financial re-regulation, if we don’t make sure this is part of the mix, I think we’re not acting appropriately.” The market moves overshadowed a series of amendments, including a failed Republican move to loosen the power of a proposed Consumer Financial Protection Bureau and a bipartisan effort to introduce a sweeping audit of the Federal Reserve.

A frantic mobilisation of Fed officials helped modify the audit amendment, which was proposed by Bernie Sanders, the independent senator from Vermont. Eventually, in an attempt to secure passage Mr Sanders agreed to keep a ring-fence around monetary policy, shielding it from congressional audits.

A vote on the amendment, which was one of several areas of regulatory reform that has concerned the Fed, was held up last night as Democrats struggled to corral their members on the Senate floor.

Earlier senators approved an amendment that would force bigger banks such as Citigroup to pay more to insure deposits, while cutting the cost for smaller institutions.

A host of other proposed changes, ranging from capping interest rates on credit cards to reintroducing the prohibition on commercial banks owning an investment bank, will be considered in the next few days.

Judd Gregg, the Republican senator from New Hampshire, predicted that the bill was now certain to pass but he hoped to make changes, including removing a provision that would force banks to spin off their derivatives trading desks.

The Democrats hope that a final vote can take place next week but Republicans warned that they intended to take as much time as they needed to consider hundreds of amendments, potentially prolonging the process.

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