Paul Volcker, the White House economics adviser who crafted a proposed ban on proprietary trading by banks, says the practice wasn't central to the financial crisis — the very argument used by some critics of the proposal.
Volcker, however, still championed the ban — dubbed the "Volcker rule" when President Barack Obama unveiled it in January — and said commercial banks don't need speculative activities to make money.
Despite Volcker's latest pitch for the proposal, it is unclear if it will survive the Congressional debate on how to overhaul the regulation of financial firms and markets.
"Particularly, proprietary trading in commercial banks was there but not central" to the crisis, Volcker, a former Federal Reserve chairman, said Tuesday in an address at the Peterson Institute for International Economics.
Such speculative activities, however, can distract banks from serving clients, Volcker said.
"There is no need economically or otherwise for them to become involved in proprietary activities, activities that in fact may often operate at cross purposes with their fiduciary responsibilities," he said.
The Volcker rule would ban trading not done on behalf of a commercial bank's customers.
Volcker delivered a wide-ranging speech on financial reform as Congress is out for a two-week recess, touching on the need to end the perception that some firms are "too big to fail" and calling for tough new capital and leverage standards.
When lawmakers return next month, financial reform will be a top priority for both the Obama administration and Congressional Democrats, who have been emboldened by the recent passage of healthcare reform.
A White House spokesman said on Tuesday that Obama wants financial reform legislation in place by September, the two-year anniversary of the 2008 Wall Street crisis.
Obama stunned financial markets in January with the proposal to restrict proprietary trading by banks, ban them from the hedge fund business, and limit their future growth.
The Volcker rule came months after the administration had sent thousands of pages of financial reforms, prompting lawmakers to ask whether the White House was using the fresh proposal as a way to punish Wall Street.
Volcker said on Tuesday that only a few banks would be affected by a ban on proprietary trading and said arguments that it would impair liquidity were overblown.
Many large banks have already scaled back their proprietary trading operations, particularly Citigroup, as they have de-leveraged in the wake of the financial meltdown.
Still, the ban could have a significant impact for some firms. Goldman Sachs has said the Volcker rule could affect as much as 10 percent of its net revenues.
Critics of the ban have said it would do little to prevent another financial crisis, pointing to remarks by Treasury Secretary Timothy Geithner, who has acknowledged that the practice was not a significant contributor.
The ban faces an uncertain future in Congress. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, has said it would be difficult to write legislative language because proprietary trading can be hard to define.
Dodd's financial reform bill — which was voted out of committee with only Democratic support — does not include an outright ban and instead instructs regulators to study the issue.
The U.S. House of Representatives passed its own financial reform effort late last year, which did not include an explicit ban on proprietary trading. Dodd is eyeing full Senate passage within a month, after which the two chambers would have to reconcile their versions of the bill.
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