Volcker Continues to Demand Glass-Steagall-type Approach

Speaking at a financial conference in Beverly Hills, California, sponsored by the Association for Corporate Growth, Paul Volcker continued to advocate a financial policy based on Glass-Steagall criteria at odds with the policy of Larry Summers and Timothy Geithner, by urging limits on the activities of banks that are considered "too big to fail."

Volcker argued that banks should be restricted to trading on their clients' behalf, instead of making bets with their own money through internal units that often act like hedge funds. "I do not think it reasonable that public money—taxpayer money—be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization. Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking. Substantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks. I want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community."

Volker said banks should be banned from sponsoring and capitalizing hedge funds and private-equity firms. He also said that particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading. He also said collateral and leverage restrictions against the largest non-bank financial institutions may be needed.

Asked if his comments represented a break with the White House's proposal, he replied: "Nothing I said today should be a surprise to the administration." Volcker will appear before Congress next week to discuss his views in more detail.