U.S. President Barack Obama unveiled strict new rules on on the size and scope of the financial industry Thursday, a move that the industry is strongly against.

Obama called for new restrictions on the operations of banks and other financial institutions to rein in excessive risk taking and protect taxpayers.

Obama said that he, and his economic team, will work with Congress “to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.”

He also announced a new proposal to limit consolidation of the financial sector, that aims to, “place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.”

The move comes amid bank earnings season, which has seen some firms report record profits, accompanied by huge compensation rewards, just a year after the system was near collapse and required a taxpayer-funded rescue. Obama has already proposed a tax on the country’s biggest banks designed to recoup the cost of the bailout over the next 10 years. This has been met by criticism that he isn’t doing enough to change the industry’s ways to avoid a recurrence of the crisis.

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said Obama.

“My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.”

Obama made the announcement of these new proposals along with the former head of the Federal Reserve Board, Paul Volcker, former chairman of the Securities and Exchange Commission, Bill Donaldson, and the heads of the Congressional committees that deal with financial services regulation (Barney Frank, chair of the House Financial Services Committee, and Chris Dodd, chairman of the Senate Banking Committee).

In the coming weeks, they will work to craft a financial reform bill “that puts in place common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of ‘too big to fail’, it said.

Financial industry lobby groups immediately reacted negatively to the news. The Financial Services Roundtable said it shares the goals of promoting responsible lending, creating jobs and promoting a stronger economy, and it supports reforms that will strengthen the financial system, help avoid another financial crisis, and promote good risk-management practices.

But, Steve Bartlett, president and CEO for the Roundtable, said, “The Administration’s new proposal is inconsistent with achieving these goals. The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs.”

The Securities Industry and Financial Markets Association also released a statement in response. “As we have said many times, our industry agrees with president Obama on the need for responsible reforms that end ‘too big to fail’ and protect against systemic risk,” said SIFMA’s president and CEO, Tim Ryan.

“Like the president proposed last year, we continue to believe the best way of achieving those goals is to establish a tough, competent and accountable systemic risk regulator. We believe providing for strengthened regulatory oversight and flexibility like that originally proposed by the Administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk and ending ‘too big to fail’.”
Apart from these new proposals, the federal banking regulators (the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) announced the final risk-based capital rule related to the Financial Accounting Standards Board’s adoption of new accounting standards that make substantive changes to how banks account for many items, including securitized assets, that had been previously excluded from these organizations’ balance sheets.

@page_break@Banking organizations affected by the new accounting standards generally will be subject to higher risk-based regulatory capital requirements, they noted, adding that the rule “better aligns risk-based capital requirements with the actual risks of certain exposures. It also provides an optional phase-in for four quarters of the impact on risk-weighted assets and tier 2 capital resulting from a banking organization’s implementation of the new accounting standards.”

The final rule will take effect 60 days after publication in the Federal Register, which is expected shortly.

IE