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February 2, 2010 6:08 pm
How is Paul Volcker’s plan different from the original Glass-Steagall law?
The 1933 Banking Act, known as Glass-Steagall after its sponsors, barred banks that took deposits from underwriting and distributing the securities of private companies. It also limited their ability to invest in securities on their own account and barred them from owning brokerage houses.
Mr Volcker’s proposal aims to limit risky behaviour but is narrower. Banks that take retail deposits would not be allowed to engage in proprietary trading that is not directly related to the market making and trading they do for customers. These banks would also be prohibited from owning or sponsoring hedge funds or private equity funds.
What do other countries think of the idea?
European Union governments were surprised by the Obama proposal and have been sceptical at the practicality of separating proprietary trading from broader market making. German officials say they believe separating riskier banking functions from retail banking could make the banking system less stable.
There was broader support at last week’s World Economic Forum in Davos for a suggestion from Lord Turner, chairman of the UK financial regulator, that proprietary trading be limited to a percentage of overall assets or business.
What other proposals are being considered to prevent very large banks from failing?
The International Monetary Fund and Mario Draghi, who heads the Financial Stability Forum, have proposed taxing large companies to create a global insurance fund, which would be available if another institution needed rescuing.
That proposal has drawn qualified approval from some leading bankers, but critics say the presence of a rescue fund would encourage banks to do even riskier things. The FSF and regulators around the world are also requiring the largest global banks and insurance companies to draw up recovery and resolution plans, also known as living wills, which would make it easier to rescue key functions and wind the rest down in case of failure.
The Basel Committee on Banking Supervision, which sets global standards, has raised capital requirements for proprietary trading and is considering whether the largest systemically important institutions should be subject to extra higher capital or liquidity requirements.
What does the industry think?
The big banks say they have cut back dramatically on proprietary trading since the crisis. They would find a percentage cap on proprietary trading far less onerous than an outright ban. The insurance fund proposal has measured support from the heads of some global banks, but others are deeply opposed to new forms of taxation, especially at a time when they are supposed to be building up capital.
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