WASHINGTON — The Treasury Department released a legislative outline Wednesday offering more details on how it would implement a ban on certain risky activities and cap financial institution size.
The administration wants to limit any bank from holding more than 10% of the industry's net liabilities. The curb would only apply when a bank was trying to expand through acquisition, similar to an existing cap on any institution holding more than 10% of the nation's deposits.
The only new element is the 10% figure. Still left unclear is how the administration would define "net liabilities," and exactly which financial firms would be covered.
Treasury announced the so-called Volcker Rule, named after former Federal Reserve Board Chairman Paul Volcker, in January, but it has failed to gain traction with lawmakers. Although the administration would like it included in regulatory reform legislation, that is extremely unlikely. House lawmakers have already passed their bill and have shown no inclination to include this new provision, while Senate lawmakers appear to want to leave a proposed ban on proprietary trading to regulators.
Lawmakers and regulators, including Fed Chairman Ben Bernanke, have argued that the Volcker Rule would be difficult to implement in legislation, but said regulators must have flexibility to address any risky activity.
In Wednesday's outline, which is included with legislative language sent to Capitol Hill, Treasury for the first time attempted to define proprietary trading, which would be banned by the Volcker Rule. The outline said such trading is "purchasing or selling, or otherwise acquiring and disposing of, stocks, bonds, options, commodities, derivatives or other financial instruments for the institution's or company's own trading book, and not on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of a customer relationship (including hedging activities related to the foregoing)."
The legislative outline also called for quantitative limits and additional capital requirements on non-bank financial firms engaged in proprietary trading, but did not detail what those limits or requirements should be.
The outline also said lawmakers should ban a bank from investing or sponsoring a hedge fund or private equity firm, including acting as a managing member or general partner of a fund, controlling the management of a fund or sharing the firm's name with a fund. Banks would be banned from lending, providing prime brokerage services or engaging in any transaction that provides support to a private fund advised by the bank.
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