Obama acts to cut back on bank risks

Yesterday the US President announced plans to limit the risks taken by major US financial institutions. This came as a complete surprise and as a result we saw sharp falls in the shares of several banks including JP Morgan Chase and Morgan Stanley. The key measure is that US banks that take ordinary personal deposits will be forced to close or sell off their proprietary trading operations. This is the type of activity that got banks like Bear Stearns (see page 197 of "Reading and Understanding Economics") into severe trouble in 2008. Put simply, the bank's prop trading desk is involved in taking bets on financial markets using the its own money rather just than carrying out a trade for a client in which only the client's money is at risk. This type of activity has been associated with the creation of clear conflicts of interest with some banks encouraging their clients to buy financial products that the banks had a stake in. It is now expected that the UK Government will follow this lead and introduce similar measures in the near future.