Undaunted by this week’s stunning electoral reverse for the ruling Democrat Party in Massachusetts, US president Barack Obama has proposed sweeping controls on the country’s banking industry, imposing limits similar to measures imposed in the 1930s amid the Great Depression, media reports said.

Mr Obama has called for banks to be banned from managing their own trading desks as part of a move to separate such dealing activity from the deposit-taking functions of a bank. He is also proposing to cap the size of banks, so that they do not grow so large as to create a “too big to fail” threat for any policymakers in future.

A split to banking functions along the proposed lines would, if it becomes law, represent a return to the Glass-Steagall law that was imposed by legislators during the 1930s and which was repealed by the Clinton administration during the late 1990s.

Media reports did not clarify whether, and how, wealth management activity would be affected by such a law. A number of the big banks that stand to be affected by such a proposal, such as Bank of America and JP Morgan, comprise investment banking, retail banking and wealth management.

Such proposals are deeply controversial and arguably do not entirely address the underlying causes of the credit and housing market bubble, which has been attributed to low interest rates and banking regulations, and political encouragement for home ownership over recent decades, regardless of risk. Some financial institutions that have been hit by the credit crunch, such as the UK-listed mortgage lender Northern Rock, for example, did not have an investment banking operation, while some banks that did have such trading activities, such as Barclays, have not been badly hit. There are also fears that political attacks on banking bonuses and risk-taking are part of an attempt by politicians to deflect blame for their own responsibility in helping to create the crisis.

Equity markets fell in the wake of the proposals, unveiled by Mr Obama yesterday.

It is feared that Mr Obama, who has also proposed a levy on banks, is succumbing to populist, anti-banker emotion at a time when his own administration has come under fire on a number of fronts. Earlier this week, the late Senator Edward Kennedy’s seat in the northeast of the US was captured by the Republicans. The high cost of bank bailouts and worries about Mr Obama's healthcare reforms have been cited as reasons for his loss of popularity since coming into office a year ago.

In a report by Bloomberg, it was said that JP Morgan and Goldman Sachs may have to sell some private-equity businesses and stop investing in buyouts as a result of Mr Obama’s proposals.