By: Reuters

White House economic adviser Paul Volcker urged Congress Tuesday to rein in risky investing by big banks to prevent them from becoming “too big to fail.”

The Senate Banking Committee holds a hearing on “Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies”. Above: Paul Volcker, Chairman of the President’s Economic Recovery Advisory

The former Federal Reserve chairman—a sage of monetary policy and crusader for tighter regulation whose star is rising in the Obama administration—faced questions from lawmakers about President Barack Obama’s latest proposals affecting big banks.

Obama stunned financial markets in late January by calling for new limits on banks’ ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.

Since then analysts have speculated widely about exactly what sort of activities would be off-limits if Congress adds the proposal, formulated by Volcker, to a sweeping package of financial regulatory changes still being debated.

Some see the boundary between proprietary trading and market-making that helps customers as blurred, but Volcker said there was little reason for uncertainty.

“Every banker I speak with knows very well what ‘proprietary trading’ means and implies,” Volcker told the Senate Banking Committee. “Only a handful of large commercial banks — maybe four or five in the United States and perhaps a couple of dozen worldwide — are now engaged in this activity in volume.”

Under the Obama proposals, banks would not be allowed to establish or maintain a separate trading desk, capitalized with their own resources and unrelated to customer business, said U.S. Treasury Deputy Secretary Neal Wolin, who also testified at the hearing.