By John McCrank and Amanda Becker
NEW YORK/WASHINGTON (Reuters) - U.S. Democratic presidential hopeful Hillary Clinton on Thursday called for the breakup of large banks that take excessive risks as part of a sweeping plan to curb what she says are Wall Street abuses.
Under the proposal, large financial firms would need to demonstrate to regulators that they can be managed effectively, with appropriate accountability, across all of their activities. If they fail to do so, regulators would have the power to make them reorganize, shrink, or break apart.
Such a law would strengthen the government's ability to break up banks it deems a threat to the financial system.
"It's not pure size, it's bad management, excessive risk and things like that, lack of controls," said Alan Blinder, a Princeton economist who helped formulate the plans. "Now the truth of the size question is that the bigger you get the harder it is to do those things effectively."
Clinton has been under pressure to join progressives within the Democratic Party calling for the government to break up banks deemed "too-big-to-fail." Both U.S. Senator Elizabeth Warren, the party's most outspoken critic of Wall Street, and U.S. Senator Bernie Sanders, Clinton's leading challenger for the Democratic nomination, have embraced such an approach.
Though the risk-based approach offered by Clinton is more nuanced, it is the centerpiece of a host of financial proposals that hew to the liberal wing of the Democratic Party. Clinton has moved to pacify left-leaning critics in other ways too lately, opposing a controversial Asian trade deal, a tax on certain health plans and a proposed Canadian oil pipeline.
Other aspects of Clinton's plan include charging banks and other institutions with more than $50 billion in assets a yearly, sliding-scale, "risk fee" based on their liabilities.
The measure would affect the country's biggest banks, including JPMorgan Chase & Co (N:JPM), Goldman Sachs Group Inc (N:GS) and Bank of America Corp (N:BAC), as well as smaller regional banks such as U.S. Bancorp (N:USB) and SunTrust Banks Inc (N:STI).
Clinton also called for raising the fines that regulators could impose on corporations and their executives, and imposing a new tax on high-frequency trading (HFT).
"These sound like much more meaningful reforms than some of the things she has suggested earlier," said former Federal Deposit Insurance Corp Chair Sheila Bair, currently president of Washington College, in Chestertown, Maryland.
Clinton's HFT tax would target securities transactions with excessive levels of order cancellations, which her campaign said unnecessarily burden markets and enable unfair and abusive trading strategies.
Trading in the mostly automated stock, foreign exchange, and government bond markets happens at nearly light speed and much of it involves investors using algorithms to hedge between asset classes. As prices move, existing orders are canceled or updated nearly instantaneously.
Updating prices is an essential as it leads to more accurate prices, capital formation and risk transfer, said Matt Andresen, co-chief executive officer of HFT firm Headlands Technology.
Andresen said while he does not agree with the HFT tax, he thinks Clinton has nuanced understanding of the financial crisis that has in the past landed her in hot water with party loyalists who expect bold statements.
"It's best not to get oneself in too much of a twist over presidential primary rhetoric," Andresen of the likelihood that the plan would come to fruition.
SHIFTING LEFT
Clinton has been considered the front runner for the Democratic nomination for the presidential election in November 2016 since she entered the race.
But Sanders, a self-proclaimed Democratic socialist from Vermont, has been closing in on Clinton in polls in crucial early-voting states and in some cases overtaking her. His rise is emblematic of a leftward shift by party members exasperated by its past coziness with Wall Street.
"One year ago, who was predicting that all top Democratic candidates would be talking about jailing Wall Street bankers, breaking up Too Big To Fail banks, and picking executive branch appointees who will crack down on Wall Street," Adam Green, co-founder of the Progressive Change Campaign Committee, which has pushed for tougher regulations, said in a statement.
Clinton would also pursue additional oversight of the "shadow-banking" sector by imposing limits on risky short-term borrowing; review recent regulatory changes to the money market fund industry for possible holes; create new reporting requirements for hedge funds and private equity firms; and strengthen the authority of the Financial Stability Oversight Council.
Clinton's reforms would build on the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, said the bill's co-author, retired Massachusetts congressman Barney Frank, who also advised Clinton on the plan.
"Politically, its very important for us to get off the situation where we're defending what we did, and get the conversation to where we're building on it," he said.
Overall, Clinton's reforms would represent significant changes to the financial system if implemented, said James Cox, a law professor at Duke University.
But the bulk of the measures require changes in the law and powerful business lobby groups like the Chamber of Commerce may be able to kill them, while efforts to hold executives more accountable or to take away some of their pay would be met by fierce resistance.
In a note to clients, Keefe, Bruyette & Woods assured them that the likelihood of the bulk of Clinton's proposals becoming law is low, given that Democrats would have to secure majorities in the U.S. Senate and House of Representatives, even if Clinton is elected.