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article imageProposal Set to Curb Bank Giants

By Owen Weldon     Jan 21, 2010 in Business
On Thursday president Obama said that he will propose new limits on the risk taken by the country's biggest banks which will be Obama's latest attack on Wall Street. The new limits could cause curbs on finance put in place throughout the great depression.
Over the last decade the nation witnessed widespread consolidation among big banks that created huge banking titans. If the new proposal is passed by congress than there could be more constraints on the size and nature of banking by the government.
The new restrictions will be based on the size of the country’s largest financial institutions. The restrictions will deter makes from becoming so big that they put the wider economy at more risk. The restrictions will also deter makes from becoming to big that they distort normal competitive practices. It is not known what limits the White House will endorse or if the president will talk about limits on Thursday.
Measures that were pushed by former Federal Reserve Chairman Paul Volcker are expected to be endorsed by Obama. The measures would target the proprietary trading done by big commercial banks, which in turn will limit how banks bet with their own capital. Officials say that firewalls should be placed between certain parts of banks and their divisions to make sure that they do not subsidize suspicious trading through other subsidiaries that are federally insured deposits.
Bank of America, Wells Fargo and J.P. Morgan Chase will be the hardest hit b the proposals. The financial institutions control a huge amount of deposits made in the U.S. Goldman Sachs, Morgan Sachs and Citigroup, which all have a big presence on Wall Street, will also be hit hard by the proposals.
If the proposal goes through than some of the biggest banks could be kept from certain activities when it comes to their investing banking units. The investing units allow banks to make their own bets on markets while underwriting securities.
In the recent years investing units have grown a lot and were also at the center of the financial crisis. Banking operations were actually less profitable than investing banking units.
Throughout the crisis the banking industry has undergone a major consolidation and left four banks with no previous market share in businesses like credit cards, deposits and mortgages.
The banks could also be stopped from running hedge funds, investing in real estate or private equity, thanks to the new rules. Those businesses have become profitable parts for banks. The collapse of Bear Stearns was caused by the fall of two hedge funds that were highly leveraged.
If investors think that the new rules could go into effect and that might push them to sell of shares of some of the biggest financial stocks because they might fear that the companies could cause them to lose profits.
A source says that the proposal would not revive the exact limits that were put in place by the Depression-era Glass Steagall Act. The act was put in place to wall off commercial banks from investment banks but was repealed in 1999. The source says that they just want to return the spirit of the act because it would limit the large banks from becoming complex that could create a huge risk to the economy.
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