President Barack Obama has unveiled plans to limit the size and power of US banks and finance firms in a new assault on the Wall Street excesses laid bare by the financial crisis.
"Never again will the American taxpayer be held hostage by a bank that is too big to fail," Obama vowed, flanked by former Federal Reserve chief Paul Volcker, who has fought to reinstate Depression-era rules that separated investment and commercial banking operations.
The plans to limit "excessive" risk taking and "protect" taxpayers are aimed at preventing banks or finance institutions from owning, investing in or sponsoring hedge fund or private equity funds.
They will effectively force finance firms to choose between proprietary activities, trading in stocks and sometimes risky financial instruments and commercial activities, such as making loans and collecting deposits.
The initiative, which must be approved by Congress, includes a proposal to limit the consolidation of the finance sector, placing broader limits on "excessive growth of the market share of liabilities" at the largest financial firms.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
Obama blamed banks for sparking the worst economic crisis since the Great Depression with "huge reckless risks in pursuit of quick profits and massive bonuses" in a "binge of irresponsibility".
He vowed to enact the reforms in Congress, even if Wall Street deployed lobbyists to kill them.
The announcement was the latest attempt by the White House to harness popular fury at massive Wall Street bonuses and tight credit markets, which is adding up to an angry political mood in a crucial election year.
Wall Street gave an immediate thumbs down to Obama's plans as US stocks plunged, with the blue-chip Dow index down two per cent at one point.
The Dow Jones Industrial Average slumped 211.76 points to 10,391.39 at midday, its biggest drop in the new year.
"The administration's new proposal is inconsistent with achieving" goals, such as promoting responsible lending, increasing jobs and promoting a stronger economy, said Steve Bartlett, president for the Financial Services Roundtable.
The groups represents 100 of the largest integrated financial services companies providing banking, insurance, and investment products and services.
But Bartlett said the group would continue to work with the president and policymakers on modernising the US regulatory framework.
Obama's first year in office was dominated by efforts to rescue a handful of banks that threatened to topple the US economy after being exposed to massive losses on the sub-prime mortgage market.
A size cap could stop the emergence of firms who can choke the flow of cash to the US economy by reducing lending as they hit trouble.
Treasury officials said about $US205 billion ($A230 billion) was pumped into 707 banks under the government rescue plans.
Last week the president announced a new fee on major banking firms to recover "every single dime" taxpayers shelled out to rescue Wall Street.
The plan, if approved by Congress, would raise $US90 billion ($A99 billion) from 50 big financial institutions, including foreign banks operating in the US.
