- Separation of deposit-taking from investment banking
- Funds fear return of Glass-Steargall
- Will Europe follow suit?
On 21 January US President Barack Obama proposed, "simple common sense" reforms to the US banking system which would severely restrict the extent to which banks would be allowed to invest in hedge funds if implemented.
Outlining what he called "the Volcker rule" after former Federal Reserve Board chairman Paul Volcker, the President said that banks had strayed from the core mission, that of serving their customers.
In a direct message for banks he said that in recent weeks Capitol Hill had seen "an army of lobbyists" descending upon it to "try and block...common sense rules of the road that would protect our economy."
Flanked by Volcker himself, the President told his audience that under his proposals "banks will no longer be allowed to own, invest, or sponsor hedge funds, proprietary trading operations...unrelated to serving their customers." If financial firms wanted to trade for profit, he said, that could be "a good thing for the markets and the economy. But they should not be allowed to run these hedge funds...while running a bank backed by the American people."
He added, "We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidised by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses."
President Obama's announcement has received a mixed response. One hedge fund chief warned against the "Glass- Steargall" type separation of deposit taking activities from investment banking and said it distracted away from the real cause of the financial crisis – which was overleveraging – and that "smothering Wall Street" would hamper the economy."
Others have noted that the devil will be in the detail, and that the White House has yet to spell out exactly how a new regime would work.
A number of European governments have issued a preliminary response. French economic minister Christine Lagarde said President Obama was "following the French lead." A Dutch Finance Ministry spokesperson, by contrast, said that while the general aim of the proposals was supported, they might prove difficult or impossible exclude and separate activities or institutions.
Meanwhile investor voted with their feet, with the Dow Jones stock exchange falling 2% on the back of the President's announcement.
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