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KAI RYSSDAL: Former Fed Chairman Paul Volcker addressed the financial industry issue of the day today: those ever-growing banks.

At a conference in New York, Volcker and a group of financial heavy-hitters unveiled a whole raft of proposals to reform the industry. And there is some serious reforming to be done. Those recommendations touch on everything from reining in hedge funds to restructuring Fannie Mae and Freddie Mac.

Marketplace’s Amy Scott was there.

AMY SCOTT: Paul Volcker had one four-letter word to sum up the state of the banking system:

PAUL VOLCKER: Beginning with M. It’s a mess.

Volcker is part of the Group of 30. Its members are corporate leaders, academics and former regulators. Today they proposed stronger oversight of “systemically important” institutions.
That is, banks, hedge funds and insurance companies whose failure could compromise the entire financial system.

Volcker says Adam Smith advised never letting an institution get that big.

VOLCKER: I think that advice, which may have been suitable for 1776 in Scotland, would be a little hard to apply in the United States and other modern economies.

Instead, Volcker and company say regulators should limit the risks those institutions can take and force them to keep more cash on hand.

John Dearie is executive vice president of the Financial Services Forum, a Wall Street trade group. The industry has long resisted increased regulation. But Dearie says he welcomes better regulation.

JOHN DEARIE: You don’t want to put a financial sector in the box and regulate out of the system its capacity for innovation, its capacity for being competitive. At the same time, how do you strike that balance with the need for a safe and sound system?

Dearie says the Group of 30 reforms seem to strike that balance. And he suspects many of them will eventually become policy.

As an adviser to the incoming Obama Administration, Volcker has the ear of the president-elect.

In New York, I’m Amy Scott for Marketplace.