A Modern Glass-Steagall: Addressing 'Too Big to Fail'
Posted by benarmstrong on 11/2/2009 12:59:41 PM.
This policy was first proposed by Paul Volcker, Former Chairman, U.S. Federal Reserve.
Level of Government: National
Status: Proposed

Abstract
Background:
The Volcker proposal calls for aggressive financial regulation that would prevent banks that are "too big to fail" from coming into existence. He calls for a legal division of commercial banks from investment houses, which would lead financial giants like JP Morgan and others to divide into multiple, smaller corporations. The Volcker plan was outlined in testimony to the House Financial Services Committee.
Purpose:
To ‘minimize the extent of emergency interventions and to damp expectations of government bailouts.’ The proposal seeks to limit the incentives for risk-taking in the financial system, and prevent the emergence of firms that are ‘too big to fail.’
 
 
Plans:
The Volcker Plan outlines new regulations that would serve to manage risk in the financial sector without hampering activity necessary for economic growth.
 
First, commercial banks should be prohibited by law from undertaking excessive risk. In order to minimize financial risk-taking that threatens public interests, commercial banks should be barred from owning or operating hedge funds or private equity operations.
 
Second, high-risk organizations including hedge funds and private equity firms should be required to report more information so that the Federal Reserve can adequately limit the risk that they pose to the economy at large.
 
Third, the Federal Reserve should continue to oversee regulation of the financial sector with the assistance of a new, apolitical office: Vice Chairman for Regulation and Supervision. The new Vice Chairman of the Federal Reserve Board is charged with coordinating the Fed’s regulatory responsibilities and ensuring the smooth integration of reforms.
 
Resources:
Implementation of the Volcker Plan will likely require two pieces of legislation. The first would prevent commercial banks from owning or having a large stake in hedge fund or private equity operations. The second would create a new position on the Federal Reserve Board: Vice Chairman of Regulation and Supervision.

Policy Details
In order to reduce the Federal Reserve's burden in supporting institutions that are "too big to fail," Volcker argues that commercial banks and investment houses should be separated. The Federal Reserve can insure deposits in commercial banks, but is not liable for the failure of investment houses. Th proposed regulation would prevent the two types of institutions from coexisting under the same corporate banner. Under Volcker's proposal, the Federal Reserve would maintain its regulatory responsibility, centralizing management therof under a new Vice Chairman.
Related Links
Volcker Congressional Testimony: Here is a link to the .pdf prepared remarks of Paul Volcker's testimony to the House Financial Services committee. In his remarks, Volcker outlines his desired regulatory reforms.
Obama Administration Reaction to Volcker Proposal (NYT): This New York Times article underscores the Obama administration's unwillingness to follow the Volcker plan. It also clarifies the more moderate administration position.

Related Articles on Pi
There are no recent articles to display.
.
Coming Soon
Re-imagining Community Colleges (CAP) in Education by Center for American Progress



Login
 
 
 

The following policies address similar issues:
Treasury Executive Pay Restrictions proposed by U.S. Treasury Department
2009 Financial Stability Plan proposed by U.S. Treasury Secretary Timothy Geithner
Economic Recovery Plans proposed by Treasury Department, Congress, Economists
Making Banking Boring proposed by Paul Krugman, The New York Times
"Clean Up The Toxic Asset Mess" proposed by Center for American Progress
A Progressive Vision for the Antitrust Division of the Justice Department proposed by David Balto, the Center for American Progress
Flexicurity proposed by Denmark, Prime Minister Poul Nyrup Rasmussen
Retirement Security for American Families proposed by President Barack Obama, The White House
A Modern Glass-Steagall: Addressing 'Too Big to Fail' proposed by Paul Volcker, Former Chairman, U.S. Federal Reserve
Wall Street Reform and Consumer Protection Act of 2009 proposed by Rep. Barney Frank, House of Representatives
The Volcker Rule proposed by President Barack Obama, The White House