Obama bank plan surprises Europe, muddies global coordination

By Reuters Staff
January 22, 2010

By Huw Jones

LONDON, Jan 22 (Reuters) – U.S. President Barack Obama’s plans to rein in banks puts Europe on the back foot and creates confusion over global efforts to coordinate financial regulation, lawyer and regulatory officials said on Friday.

Obama proposed on Thursday to curb banks’ size and risk-taking, sending shares in major institutions down.

Senior officials and lawmakers involved in regulatory policymaking at a global and European level said they had been kept in the dark about the plans.

The G20 group of leading countries agreed last year in Pittsburgh at a summit hosted by Obama to coordinate their regulatory response to the financial crisis through the Financial Stability Board.

“Everybody was coordinating their work through the G20, the Financial Stability Board and the Basel Committee. The global process is not getting out of control but there is a little bit of that. Many in Europe were surprised yesterday,” an official involved in the global regulation process said.

“We saw the UK push ahead on its own with its own liquidity rules and now we have this from the United States. Nobody knows the details or whether other countries may follow. This is creating regulatory confusion,” the official said.

Markets are spooked partially because of the speed at which Obama has made his announcement without warning to Europe or Asia or providing adequate detail, legal and regulatory experts said.

Swiss-based FSB, which is due to come out with proposals in October on how to tackle banks whose failure would destabilise the financial system, said on Friday the U.S. move would not pre-empt the board’s timetable.

Politicians in France, Britain and Germany cautiously welcomed the U.S. plans as a way to cut banking risk but it was by no means clear they were willing to go as far as Obama.

“This is outside the global structure that has been put in place because of domestic political pressure,” the official said, in reference to the political setback Obama’s Democrats suffered this week in the Massachusetts Senate election.

Europe looked left out again on a major policy initiative after it was sidelined last month at the Copenhagen climate change conference when the United States and China thrashed out a deal, leaving the EU sidelined.

Incoming EU financial services commissioner, Michel Barnier, told the European Parliament last week the G20 accord would be his roadmap for new rules. The European Commission had no comment on Friday.

STEP CHANGE

Obama’s initiative represents a step change from the G20 blueprint by going well beyond ramping up capital charges on banking activities such as trading.

“We were a little surprised but you have to move on,” said Peter Skinner, a British centre-left member of the EU assembly who quizzed Barnier at a hearing in parliament last week.

“I welcome this. Ideally better coordination would have been asked for but this does not harm the global response. We in Europe should start to take a leaf out of Obama’s book. Europe is now forced to play a similar card,” Skinner said.

Obama’s move need not derail the G20 roadmap, lawyers said.

“But it does alter the dynamic. It puts Europe in a crossroads situation. They have a choice to make,” said Michael McKee of law firm DLA Piper.

Regulatory officials are waiting to see how Obama’s plan will be fleshed out and whether it still has teeth if Congress gives the nod.

“If the United States did go down this route but Europe and the G20 did not follow, it would be very, very difficult for a U.S. government to allow non-U.S. banks to continue to operate in the United States,” said Simon Gleeson, a lawyer specialising in financial services at Clifford Chance.

“Thus if the EU or the G20 doesn’t follow on we could be looking at a serious financial services trade war,” Gleeson said.

It will difficult defining the border between deposit taking and trading activities in Europe where the universal banking model is prevalent, lawyers said.

“European markets have a greater need for the liquidity that flows from the universal bank model because our equity markets are less developed,” DLA Piper’s McKee said.

Adair Turner, chairman of Britain’s Financial Services Authority, has argued that a clear line cannot be drawn and that bumping up capital charges on risky activities like trading was the best route — a step global regulators have already taken and comes into effect from January 2011.

“The U.S. proposals are interesting options aiming to address the issues, without going as far as full separation based on a legal definition of activities being undertaken by a firm,” the FSA said on Friday.

Many banks in Europe were already pulling back from proprietary trading due to lower profitability and looming punitive capital charges, lawyers said.

The key question for Europe was whether it will satisfy itself with a separation of activities within banking groups between commercial and investment banking activities or break them up completely, Clifford Chance’s Gleeson said.

“Obama seems to want to go all the way towards a complete break-up, and this move must make it more likely that Europe and the G20 will follow this line,” Gleeson said. (Reporting by Huw Jones, editing by Mike Peacock) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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