Obama: set for banking revolution

Obama's reforms

New financial proposals, which include limits in the size of banks and restrictions on riskier trading, have been announced by US President Barack Obama in an effort to prevent future financial crises.

According to Obama, the plans - which mark the US's most far-reaching proposals to date - will ensure that the American taxpayer is never "held hostage by banks that are too big to fail again." He added he was ready for a "fight" with any banks prepared to lobby against tougher regulations.

Shockwaves

The news, which sent shockwaves across Wall Street when it came to light on Thursday, is likely to leave investors running scared as they fear such limits will only be detrimental to the strength of certain firms.

That's because the plan, which is largely aimed at limiting so-called "excessive" risks, will prevent banks and other financial institutions from owning, investing in or sponsoring hedge funds or private equity funds.

Reports suggest that such a move would most likely force a financial firm to choose between proprietary activities - trading in stocks and sometimes risky financial instruments on its own account - and commercial activities, like making loans and collecting deposits.

What's more, the proposals, which still need approval by Congress, also include plans to limit the consolidation of the financial sector, placing broader limits on "excessive growth of the market share of liabilities" at the largest financial firms.

A return to form?

There are concerns now surfacing that the proposed plans could mark a significant setback for the financial system, largely because the plans mimic a number of the measures from a Depression-era law that separated investment banks and commercial banks, known as the Glass-Steagall Act.

For instance, Sung Won Sohn, economist at California State University, warned that, even if approved, the move might not achieve its desired impact because the global system is interconnected.

"Most countries, including Europe, have no acts kind of Glass-Steagall in place anymore, so they have a free range to get into almost every aspect of finance," he told the Associated Press. "I don't think we should handicap American institutions."

However, according to top Obama aide Austan Goolsbee, the real goal of the proposed Volcker rule - named after Paul Volcker, former head of the Federal Reserve and current Chair of the Economic Recovery Advisory Board - said the goal is to refocus banks but is "not a return to Glass-Steagall."

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