US war on banks coming to UK next week. President Obama's pledge on Thursday afternoon to end the "excess and abuse" and a "binge of irresponsibility" in the financial system, shook shares in banks.
His proposals are twofold: first to stop banks from proprietary trading – where a bank bets on markets with its own money – for their own gain and against their own customers; and second, to limit the pace of sector consolidation to ensure no one bank becomes too large.
Mr Obama said banks would no longer "be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers." Officials from the US administration are reportedly planning to fly to London next week in an effort to persuade the UK government to adopt similar plans.
For the banks, the move threatens to hurt an area of business which has been highly lucrative for major investment banks in recent years, and could lead to the need for major banking conglomerates including Citigroup and Bank of America to hive off parts of their core business. Mr Obama's second aim, to limit bank size, will involve extending the current 10pc cap on the share of insured deposits to take into account what he called "wider forms of funding employed by large financial institutions."
Although major banks including JP Morgan Chase and Goldman Sachs chose not to comment, the Financial Services Roundtable, which represents the US's biggest banks, said: "The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs."
Marc Faber: Obama Makes Bush Look Like Genius
The US administration's interventions in the market will not solve problems and will bring about unintended consequences, Marc Faber, author and publisher of the "Gloom, Boom & Doom Report," told CNBC Friday.
President Barack Obama on Thursday proposed new limits on the size and trading practices of big banks, to prevent excessive risk-taking.
"I don't have a very high opinion of Mr. Obama," Faber told "Squawk Box Europe." "I was negative of Mr. Bush but I think Mr. Obama makes him look like a genius."
"Basically I think everybody will agree that in an economic system the market solves problems best."
The result of the slashing of interest rates to 0 percent in the autumn of 2007 was the surge in oil prices in the first half of 2008, because investors were looking for a place to put their money to get a return, he explained.
Comments
President Obama attacks critics of bank reform bill
US President Barack Obama has attacked critics of his banking reforms in a speech which warned that without change the financial crisis will be repeated.
Reckless practices and financial firms that acted like "bandits" should never be allowed to operate again, he said. Regulatory reform was in the financial sector's interests, and bankers and lobbyists should not fight against it. Mr Obama was speaking to an audience of bankers and financial experts at the Cooper Union college in New York. A bill proposing tighter regulation is due to be debated in the US Upper House, the Senate, next week. It was approved by the Lower House, the House of Representatives, in December. The proposed rules would include a new body to safeguard consumers' rights - a consumer protection agency at the US central bank, the Federal Reserve - which would have powers to regulate all lending. But many people in the financial sector are aghast at the proposed changes. Mr Obama said that he was not, as some have argued, against the power of the free market.
Doomed to repeat
"But a free market was never meant to be a free licence to take whatever you can get, however you can get it. That is what happened too often in the years leading up to the crisis," he told the New York audience. "Some on Wall Street forgot that behind every dollar traded or leveraged, there is a family looking to buy a house, pay for an education, open a business, or save for retirement. "What happens here has real consequences across our country," he said. "It is essential that we learn the lessons of the crisis, so we don't doom ourselves to repeat it." Financial reforms would ensure that the markets no longer "operated in the shadows of our economy, invisible to regulators and to the public". Abuses and excesses were rampant, the President said. But it was now essential that regulators had the power to "shut these firms down with the least amount of collateral damage to innocent people and businesses".
Lobbyists
The reform proposals include setting up a $50bn (£32.5bn) fund to assist with orderly liquidation of banks. But Republicans see this as still allowing taxpayer bail-outs, arguing that any fund could borrow from the Treasury. The bill also suggests limiting banks' involvement in proprietary trading - where they trade their own money rather than that of investors - the so-called Volcker Rule, after the former head of the Federal Reserve who is now an adviser to President Obama. And it proposes limiting banks' investments in hedge funds and private equity funds, and more say for investors on executive pay. Mr Obama made special mention of the "battalions of financial industry lobbyists descending on Capitol Hill, as firms spend millions" to try to block his reforms.
Awkward spot
President Obama has a 59-41 Democrat majority over Republicans in the Senate, but that is one vote short of the number needed. Republicans largely view the bill as just more government bureaucracy, and they are pushing for parts of it to be changed. But the US Treasury Secretary, Timothy Geithner, said he was confident that financial reform legislation will pass. He says Republican opposition appears to have softened. He told CBS Television earlier: "If you just listen to the tone of the last couple of days, it's changed. "I spent a huge amount of time with Republicans over the last few weeks ... and I think they really want to be for this." Opposition to the bill in any case puts Republicans in a awkward spot, says BBC North America editor Mark Mardell. "If they vote against it they will be painted as the party that backed their wealthy friends on Wall Street, and put at risk the people on Main Street." If he does succeed in attracting at least the one Republican vote and gets it through the Senate, it will still have to be reconciled in a joint committee with the House, before it goes to the president for his signature and becomes law.
Alistair Darling pledges to crack down on proprietary trading
Alistair Darling, the Chancellor, has pledged to squeeze all banks which rely too heavily on proprietary trading, and signalled his support for a permanent Obama-style tax on the banking system.
He insisted that although he does not intend to impose Barack Obama’s proposal to impose a cap on the size of big banks, and to slice off their prop trading arms, he is planning a clampdown which will have much the same effect.
t;In comments on the sidelines of the World Economic Forum in Davos, Mr Darling also urged international regulators to speed through new Basel rules which will effectively limit banks’ profitability by the end of the year, saying he was “frustrated” with the speed with which they were progressing.
The remarks are likely to cause consternation among Britain’s banking chiefs, a number of whom the Chancellor met in a private breakfast meeting later in Davos.
Some of them had assumed that because Mr Darling did not stand directly behind President Obama’s so-called Volcker plan, he would also refrain from imposing swingeing new regulations on the sector.
However, the Chancellor said that although he did not intend to put arbitrary limits on the size of banks, he supported restraints on prop trading.
Rather than simply banning banks from doing it outright, he said he planned to impose new top-up capital requirements on those banks taking the most risks on their own account.
“With prop trading, where banks are involved in risky activity, they must have capital requirements related to that risk,” he said, adding later: “Once we come through this process maybe there will not be as much difference as people think.”
He said that he was working with the US on a permanent “insurance levy” on the banking system, which financial groups would pay into to fund future bail-outs, saying: “In principle, the idea that banks contribute to some sort of resolution fund is something we have floated. We are keen to work on a plan on this with other countries - it might have some traction.”
He said it would be foolish for banks not to co-operate with the Government on these reforms, saying: “It is actually in their interests to get off the front pages, and to do what they are supposed to do, which is to provide credit to the economy. They can all see that the regulation regime needed to be more realistic and more intrusive; Rather than feeling sorry for themselves, the best thing to do is to work with governments.”
Mr Darling also said he was worried about the length of time it was taking for international regulators to agree on the new Basel rules which will determine the amount of capital banks should require, and said these ought to be completed by the end of the year - far earlier than is currently anticipated.
He said: “It is fair to say that there is quite a lot of frustration among finance ministers across the world on this.”
Source: Telegraph
Trichet: US reforms “relevant and interesting”
President Barack Obama’s proposals to rein in the US banking sector and its practices could be enacted into law within six months, according to a key congressional leader.
The plan unveiled last week was drafted by Paul Volcker, the former Federal Reserve head and chairman of Mr Obama’s Economic Recovery Advisory Board.
The twin proposals unveiled by Mr Obama last week would constrain the biggest banks from growing and force them to shed hedge fund, private equity and proprietary trading activities.
Mr Frank said he would insist that banks must be given sufficient time – “at least three years” – to divest hedge fund and private equity assets or trim their size. “You can’t have a fire sale. There would have to be a phase-in,” he said.
The initiative was dubbed Glass-Steagall lite by some commentators, who saw in it a slimmed down version of the 1930s legislation that forced commercial and investment banks to split.
His comments came as Bob Diamond, the president of Barclays, said the proposals would do nothing to make the financial world a safer place.
“If you say that ‘large is bad’ and we move to narrow banks, the impact on jobs and the global economy will be very negative,” he said. “I have seen no evidence to suggest that shrinking banks and making banks smaller and more narrow [will help].”
Although Mr Diamond said he recognised that regulatory demands for higher levels of capital and liquidity would be essential, describing “more intrusive regulation” as “a good thing”, he stressed the need for the new rules to be “connected [across] the major economies around the world”.
He also said it was hard to define proprietary trading – the practice of a bank betting its own capital on market movements – or to distinguish it from market making.
Jean-Claude Trichet, the European Central Bank president, told the Wall Street Journal that the proposed US reforms were “relevant and interesting” and shared the same aims as European measures.
He said he thought the UK, in particular, was “ready to come with us”. So far the UK government has made only cautious statements about examining Mr Obama’s plans. George Osborne, Treasury spokesman for the opposition Conservative party, has been vocal about his support for US moves to rein in the banks.
Europe and Volcker’s rule
FT ALPHAVLILLE
(via Ian Fraser on Twitter)
Dutch to support U.S. bank plan, seek EU support
No Brainer
Volcker Plan Freaks Out European Bank Equities
Alistair Darling warns Barack Obama