WASHINGTON — An Obama administration push to ban banks from proprietary trading and limit their growth suffered a setback Tuesday as lawmakers from both parties raised concerns that the so-called "Volcker Rule" would have done little to nothing to prevent the financial crisis.

Though administration officials — including former Federal Reserve Board chairman Paul Volcker — acknowledged as much, they said the plan was still necessary to minimize risk in the commercial banking system.

The plan won at least some support from Senate Banking Committee Chairman Chris Dodd, who said it had "great merit," but it was panned by other panel members.

Overall, it remained unclear whether the Connecticut Democrat would seek to include the proposals in regulatory reform legislation.

"The administration is headed in the right direction with these two proposals; they deserve serious consideration," said Dodd. "I know the manner in which they have been introduced has raised some eyebrows, but I think we need to get past that if we can and focus on the merits."

Dodd said he has questions on how exactly the plan would work. He added that he's been making calls to the administration on those concerns, but has not received answers.

Sen. Richard Shelby, the lead GOP panel member, said he felt the plan had been "airdropped into the debate" and questioned the administration's motives. "I hope that this is not an indication that the administration intends to substitute thoughtful analysis with whatever polls say on a given day," he said.

Still, the Alabama Republican did not rule it out completely, saying he was open to the proposals, but signaling they could be dealt with later. "Whether they can be considered now or whether they can be considered at a later date," they should still be examined.

Amid tough questions from lawmakers, administration officials testifying on the proposals spent much of the hearing on the defensive.

Sen. Bob Corker, R-Tenn., questioned Volcker on why lawmakers should ban proprietary trading, arguing it had not caused the financial crisis.

"There are firewalls that exist — there is no commercial bank that failed due to proprietary trading or owning a hedge fund," he said.

Corker was echoed by Sen. Mike Johanns, R-Neb., who asked Volcker and Deputy Treasury Secretary Neal Wolin whether the proposals would have prevented the crisis. "I think you are going is to say that this is a great opportunity while we are doing regulatory reform," he said, "but it would not have solved the problem with AIG or with Lehman Brothers."

Wolin responded: "The Volcker rule — had it been in place — would not have stopped the crisis."

"But there were holding companies that suffered losses in their hedge funds … ; they did benefit from the federal safety net system," he said. "That's something we can, and should, avoid as we construct the process going forward."

Dodd said Congress is not just trying to correct mistakes that led to the crisis. Lawmakers are "looking back and plugging gaps but also looking forward," he said.

Volcker warned lawmakers that, if they did not pass these proposals, they would eventually regret it. "I tell you, sure as I am sitting here, that, if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you," he said.

Wolin also tried to respond to criticism that growth constraints on the largest banks would effectively break them up. Instead, he said constraints would merely prevent them from getting bigger.

"This new financial sector size limit should not require existing firms to divest operations," he said. "But it should serve as a constraint on future excessive consolidation among our major financial firms … . It should constrain the capacity of our very largest financial firms to grow by acquisition."

Wolin compared the constraints to the current deposit cap, which bars banks from buying another company if it would result in their holding more than 10% of the domestic deposit base. The cap does allow institutions to grow organically past that level.

"The new limit should supplement but not replace the existing deposit cap," Wolin said. "It should at a minimum cover all firms that control one or more insured depository institutions, as well as all other major financial firms that are so large and interconnected that they will be brought into the system of consolidated, comprehensive supervision contemplated by our reforms."

In his testimony, Volcker offered a point-by-point defense against recent criticisms, saying his plan would still allow banks plenty of ways to make money and would not leave institutions at a competitive disadvantage globally.

Though conceding that his plan would require "strong international consensus … , particularly across those few nations hosting large, multinational banks and active financial markets," he said that this is within reach.

"Judging from what we know and read about the attitude of a number of responsible officials and commentators, I believe there are substantial grounds to anticipate success as the approach is fully understood," he said.

Volcker also responded to criticism that it would be difficult to define the types of risky pools of capital that banks would be prohibited to own; it would be straightforward for regulators to assess, he said.

He cautioned, however, that regulators would need to remain on guard against bankers who skirt the spirit of the rules by coming up with new pools of capital that escaped the rule's definition.

"Authority provided to the appropriate supervisory agency should be carefully specified," he said. "It also needs to be broad enough to encompass efforts sure to come to circumvent the intent of the law. We do not need or want a new breed of bank-based funds that in all but name would function as hedge or equity funds."

He also flatly rejected the claim that defining proprietary trading would be tricky.

"Every banker I speak with knows very well what 'proprietary trading' means and implies," said Volcker.

He estimated that only a handful of large commercial banks — maybe four or five in the U.S. and perhaps a couple of dozen worldwide — would be affected by the new limits. He suggested that regulators should analyze the volume of trades relative to customer relationships and the relative volatility of gains and losses and then impose "substantially" higher capital requirements when "patterns of exceptionally large gains and losses" are found.

To bolster his case, Volcker highlighted what he called strong conflicts of interest between proprietary and private investment activity at commercial banks, arguing that it creates perverse side effects that are risky and let banks unfairly profit from knowledge of customer trades.

"When the bank itself is a 'customer,' i.e., it is trading for its own account, it will almost inevitably find itself, consciously or inadvertently, acting at cross purposes to the interests of an unrelated commercial customer of a bank," he said.