Europe welcomes Obama bank plan, won’t imitate it

By Reuters Staff
January 22, 2010

By Keith Weir and Crispian Balmer

LONDON/PARIS, Jan 22 (Reuters) – Major European economies offered support on Friday for U.S. President Barack Obama’s plan to limit banks’ size and trading activities but indicated they had no plans to follow suit.

Obama’s dramatic proposals could rewrite the world financial order but experts said they were light on detail and could cloud the global approach fostered by the Group of 20 nations.

The European Union will not imitate Obama’s plan, because it aims to reduce risk in the sector through other means, an EU source said on Friday.

“Look, we understand the U.S. position and we understand his reasons. But I can’t see the EU going down this route,” the source, who is close to EU financial policymaking, told Reuters.

“The U.S. finds itself a little behind us on this. The Obama plan is not fit for the purpose in the EU.”

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”.

UK Treasury Minister Paul Myners said Britain already had acted to address problems in its banking industry.

“He’s developing a solution to what he sees as the American issues, we’ve already taken the necessary action in the UK,” Myners said in an interview with Reuters Insider TV.

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

Doubts remain as to whether Obama’s scheme can 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 out many of them.

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

The EU source, who declined to be named, said the 27-nation bloc would focus on raising banks’ capital requirements and tightening financial regulation, pursuing initiatives already under way in the European Parliament.

“The Obama plan is really back to the future. These sort of plans were implemented after the Great Depression and then taken away in the ’60s. He is sort of reinstating the same plans to deal with this crisis,” the source said.

“What is key to remember is that the U.S. is one market, the EU is 27 markets and we are trying to encourage cross-border financial services and more importantly consolidation in both national and trans-national markets. The Obama plan would be anti-competitive in EU terms.”

The source said most top banks in the world were American or had roots there, so it was understandable that Obama wanted to curb their size.

“The EU does not have so many ‘too big to fail’ institutions, to be honest. Also, we have already started restructuring of our banks, forcing them to downsize, sell off units and open up to newcomers.”

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For graphics on Obama’s plan and bank regulation, click on: http://graphics.thomsonreuters.com/RNGS/2010/JAN/BANK.jpg http://graphics.thomsonreuters.com/0110/GLB_BNKTL0110.gif

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WILL IT FLY?

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

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

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

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.

Spain’s deputy prime minister Maria Teres Fernandez de la Vega said her country shared Obama’s views about the causes of the crisis but that each country should take its own measures.

The European response echoed that to Obama’s announcement last week that Wall Street banks should should pay a levy of up to $117 billion to reimburse taxpayers for their bailout.

Britain, France and Germany extolled the idea but said they had their own plans and would not follow suit.

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

On the other side of the coin, the International Monetary Fund has been tasked to look at a global tax on financial transactions, proposed by Britain’s Gordon Brown late last year and supported by European Union leaders.

The U.S. administration is opposed to that.

(Writing by Mike Peacock, Editing by Lin Noueihed) ((email: mike.peacock@thomsonreuters.com; Reuters Messaging: mike.peacock.reuters.com@reuters.net: +44 207 542 3784))

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