Barney Frank Says Derivatives Spinoff Proposal ‘Goes Too Far’

House Financial Services Committee Chairman Barney Frank (D., Mass.) on Tuesday said the White House’s proposal to force banks to spin off bank derivative arms “goes too far.”

“Banks ought to be able to hedge their own risks,” Frank said, adding that the Volcker Rule, which would prohibit high-risk trading, limits the use of derivatives at most financial institutions therefore the separate provision in the final financial overhaul bill forcing banks to spin off their derivative businesses wouldn’t be necessary.

WSJ: “I don’t see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply to derivatives as well as everything else,” Mr. Frank said.

He said banks would be able to do derivatives under the rules established by the bill “for their own commercial risk or their customers, but they will not be able to run separate profit centers where they trade them.”

Mr. Frank’s opposition to the derivatives spin-off proposal, which has been championed by Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.) who has has proposed a plan under which banks wouldn’t necessarily be barred from using derivatives ; they could spin off the businesses and buy derivatives from them —  raises the chances that this provision will likely be modified or stripped out completely because Mr. Frank’s comments on it were incisive.

Mr. Frank’s comments were delivered in a speech at the Mayflower Hotel in Washington, D.C.

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