A senior adviser to U.S. President Barack Obama called Tuesday for limits on high-risk trading by big banks.

Paul Volcker, chairman of Obama's economic recovery advisory board, told the Senate banking committee that prohibiting commercial banks from some high-risk trades should be an essential component of broader financial reform.

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U.S. economic recovery advisory board chairman Paul Volcker says lawmakers should ban high-risk speculation by banks and bank holding companies. ((Cliff Owen/Associated Press))

The former chairman of the Federal Reserve said limits would reduce the number of institutions deemed "too big to fail."

Volcker was testifying before the committee to push bank reforms proposed by the White House.

Limiting the scope of operations of big banks has been a long-time campaign of Volcker's, something he raised at a business forum in Calgary as early as September 2008.

Obama has endorsed Volcker's idea to ban large banks that both hold people's investments and raise capital for companies — such as Goldman Sachs — from engaging in speculative trading. Large banks oppose the idea.

Volcker said that commercial banks, which hold people's savings deposits, should not be allowed to engage in speculation that does not benefit those savers, especially given that the goverment insures the deposits.

"Hedge funds, private equity funds and trading activities unrelated to customer needs, unrelated to continuing banking relationships, should stand on their own, without the subsidies implied by public support for depository institutions," Volcker said.

The ban would distinguish between commercial banks — which hold people's savings — and investment banks, which raise capital for businesses. That separation existed under the Depression-era Glass-Steagall Act until 1999 when Congress and President Bill Clinton repealed major provisions of the act.

With files from The Associated Press