President Barack Obama is set to toughen his approach to Wall Street regulation on Thursday, announcing limits on the size of proprietary trading operations in the second broadside against banks this month.
Mr Obama will make his remarks after a meeting with Paul Volcker, the White House adviser and former Federal Reserve chairman, whose more far-reaching vision of curbing banks’ riskier activities has been sidelined until now in favour of reforms drafted in the Treasury.
“A couple of months ago the president began discussing with his economic team the need to include in financial reform more specific and stronger provisions to limit the size and scope of financial institutions to cut down on excessive risk taking,” said an administration official on Wednesday.
“The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with [the House of Representatives] and Senate to work this into legislation moving on the Hill.”
The announcement is likely to stop short of the return to a forced separation between riskier investment banking and the utility functions of retail and commercial banking that was enshrined in the Glass-Steagall Act.
Goldman Sachs, which runs a large proprietary trading business, will be watching the details closely but the measures are more likely to threaten institutions whose operations are large and span commercial and retail operations as well as trading for their own benefit.
Proposals working their way through Congress already allow regulators to force large interconnected institutions to sell off divisions that could pose a threat to the financial system.
After Tuesday’s defeat for the Democrats in Massachussetts, Mr Obama will seek to regain the political initiative from a Republican party that is jubilant after removing the 60-vote super-majority in the Senate.
Mr Obama and Tim Geithner, his Treasury secretary, have come under increasing pressure from liberal members of Congress to take draconian measures against banks. Some think it is necessary to prevent a repeat of the financial crisis while others believe a more populist stance could shore up Democrats’ waning popularity.
Earlier this month the Obama administration announced a levy on the largest banks to recoup $90bn over 10 years, which officials claim is the minimum owed for the government’s rescue of the system.
Some industry groups have sought legal advice on the pronmspects of challenging the levy in court.
Thursday’s announcement, which will be welcomed by some independent economists as well as a cross-section of politicians, will be seen by the industry as adding to the increasingly unpredictable policy stance of the Obama administration.