Dramatic Obama bank plan wins some backing in Europe

Keith Weir and Crispian Balmer
Reuters US Online Report Politics News

Jan 22, 2010 08:11 EST

LONDON/PARIS (Reuters) - France, Britain and Germany offered some support on Friday for U.S. President Barack Obama's plan to curb banks' size and trading activities, which has stunned markets and could rewrite the world's financial order.

But, with each having their own ideas on banking regulation, they fell short of pledging to follow suit and experts said Obama's dramatic initiative could cloud the global approach fostered by the Group of 20 nations.

Obama made his proposals on Thursday, saying he was ready to fight resistance from Wall Street banks he blamed for helping cause the global financial crisis.

The plan would prevent banks from investing in, owning or sponsoring a hedge fund or private equity fund.

It would set a new limit on banks' size in relation to the overall financial sector and, perhaps most dramatically, could also bar institutions from proprietary trading operations, which are unrelated to serving customers, for their own profit.

Proprietary trading involves firms making bets on markets with their own money and has been the source of much of banks' bumper profits before and after the financial crisis.

French Economy Minister Christine Lagarde welcomed the proposal, saying it was a "very, very good step forward."

"They see that regulation, which was a taboo word that was difficult to use in financial circles in the United States, is vital to contain ... banking excesses," she said.

A spokesman for British Prime Minister Gordon Brown said he was "comfortable" with the thrust of Obama's plans but needed to look at the details as different countries had different needs.

But Britain's opposition Conservatives, tipped by polls to win an election to be held by June, offered more solid support.

"President Obama has created a lot of space for the rest of the world to come up with what I think would be a sensible system of international rules," Conservative finance spokesman George Osborne told BBC Radio.

"I have said consistently that we should look at separating retail banking from activities like large-scale propriety trading and that this was best done internationally."

Doubts remain as to whether Obama's scheme will be enacted unchanged, not least since his party lost a key Senate seat this week, depriving it of a "super majority" in that house.

But it will strike a popular chord.

Banks' return to paying massive bonuses has prompted public and media outrage in the United States and Europe after taxpayer money was used to bail many of them out.

Wall Street sold off on Thursday and the threat that other countries will follow Obama's lead rattled European lenders.

WILL IT FLY?

Washington will have to gain worldwide support for its measures or risk international banks fleeing its shores.

An official involved in the global regulation process said many in Europe were caught on the hop.

"Everybody was coordinating their work through the G20, the Financial Stability Board and the Basel Committee," the official said. "Nobody knows the details or whether other countries may follow. This is creating regulatory confusion."

The German finance ministry stressed the need to move forward internationally and said Berlin would present its own proposals on improving banking regulation.

"We see the new proposals as a helpful suggestion for the continuing discussions on an international level. And we're obviously aiming to find a solution to the problem of the 'too big to fail' issue," ministry spokesman Michael Offer said.

Osborne also alluded to the dangers of acting alone.

"I don't want to do things that unilaterally damage the City of London, or unilaterally damage British banks," he said.

"If we need new rules they should be agreed internationally and I think the G20 meeting in South Korea in a few months time is a good place to try and map out those rules."

In September, a summit of Group of 20 leaders called for crackdowns on bankers' bonuses and a build-up in banks' capital.

But while there are still signs of international intent, different centers are increasingly pursuing different paths.

A Dutch Finance Ministry spokesman said it supported the "general aim" of Obama's "ambitious" proposals but cast doubt on whether they would actually be possible.

A Spanish government source said the measures may not have much application in Spain, "given that prop trading is not a very generalized practice."

After Obama last week proposed Wall Street banks pay a levy of up to $117 billion to reimburse taxpayers for their bailout, Britons, French and Germans extolled the idea but indicated they had their own plans and would not follow suit.

London and Paris plan a 50 percent tax on bank bonuses.

Similarly, the International Monetary Fund has been tasked to look at a global tax on financial transactions, first proposed by Britain's Gordon Brown late last year.

The U.S. administration is opposed to that.

(Writing by Mike Peacock, Editing by Lin Noueihed)

Source: Reuters US Online Report Politics News