Financial Stability Board Welcomes Obama Proposal on Bank Proprietary Trading As It Readies Similar Proposal for G-20

The Financial Stability Board welcomes the Obama Administration’s proposals for reducing the risk of moral hazard by prohibiting banks and financial institution that contain a bank from owning, investing in or sponsoring a hedge fund or a private equity fund, or engaging in proprietary trading operations unrelated to serving customers for their own profit. The President also announced a new proposal to limit the consolidation of the financial sector by placing broader limits on the excessive growth of the market share of liabilities at the largest financial firms.

The proposals are among a range of options and approaches that the Board has also been considering as it works to address the moral hazard risks posed by systemically important, too-big-too-fail financial institutions. The Board said that it plans to publish an interim report on this effort shortly after the June G-20 summit, and will make recommendations to the G-20 leaders in October.

The range of options being examined by the Board include targeted capital and leverage requirements, simplification of firm structures, enhanced national and cross-border resolution frameworks, and infrastructure changes at financial institutions that reduce contagion risks. The Board believes that a mix of approaches will be needed to address the problem, given the different types of institutions and national and cross-border issues. At the same time, these approaches must preserve an integrated financial services market and not create regulatory arbitrage through an uneven playing field.

The Board is armed with a mandate from the G-20 to promote globally consistent financial regulation as the US and the EU prepare major reform legislation. There are standing Board committees designed to ensure consistent cross-border high quality financial regulation and avoid regulatory arbitrage. The Obama Administration’s plan for regulatory reform also endorsed the Financial Stability Board’s role as coordinator of consistent cross-border financial regulation and arrangements for international cooperation on supervision of global financial firms through establishment of supervisory colleges.

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