Financial Regulatory Forum

DAVOS – Business warns regulation may crimp recovery

By Reuters Staff
January 27, 2010

By Ben Hirschler and Martin Howell

DAVOS, Switzerland, Jan 27 (Reuters) – Global business leaders warned Western governments on Wednesday that a populist crackdown on the financial industry could crimp a fragile recovery from the worst recession since the 1930s.

The worried response to U.S. President Barack Obama’s plans to curb big banks and a British assault on bankers’ pay came as 2,500 business leaders and policy makers met at the World Economic Forum in the Swiss ski resort of Davos.

Surveys produced for the annual conference showed global economic confidence on the rise after deep gloom in 2009 and a cautious return to hiring, especially in emerging markets.

But the spectre of uncoordinated, heavy-handed regulation and government intervention in the economy was the biggest cloud on many business leaders’ horizon. Uncertainties over whether China will rein in its feverish pace of growth and concerns about how Greece will tackle its debt crisis also weighed.

Obama jolted markets on Jan. 21 with proposals to force commercial banks to cut ties with hedge funds and private equity funds and stop proprietary trading, and to make the financial sector pay for a massive taxpayer bailout.

Barclays President Bob Diamond challenged Obama’s effort to limit the size of big banks and restrain risk-taking, telling the opening forum session: “I’ve seen no evidence that suggests that shrinking banks and making all banks smaller or more narrow is the answer.”

“If you step back and say large is bad, and we move to narrow banking, the impact of that on banks and on global trade, the global economy, would be very negative.”

Standard Chartered bank CEO Peter Sands said there was a growing risk that fragmented regulatory initiatives would “create enormous amounts of complexity” and encourage financial companies to arbitrage among regulators.

U.S. Congressman Barney Frank, a key Democratic lawmaker on financial regulation, said that unlike when 2002′s Sarbanes-Oxley Act accounting rules drove many firms out of the United States, regulators in Washington and London were now working closely together to avoid future crises.

“You can’t play mommy and daddy against each other now,” he said.

Stephen Schwarzman, chief executive of the private equity firm Blackstone Group <BX.N>, told Reuters discussions about financial regulation reform should take place at a global level in bodies such as the Bank for International Settlements rather than at single-country level.

 CONFIDENCE REBOUNDS

A study by accountancy giant PricewaterhouseCoopers showed business confidence bouncing back after the sharpest drop in economic activity since World War Two, prompting more industry leaders to start hiring again.

The survey of 1,200 chief executives in 52 countries found 39 percent of industry bosses aimed to hire extra staff in 2010, while 25 percent planned more job cuts, down from nearly half who slashed jobs last year.

But recruitment will be on a modest scale and mostly in booming emerging economies such as China and India, rather than in the developed world, the report showed.

Obama’s proposed curbs on Wall Street drew guarded support from European governments but could complicate efforts to build a global consensus on financial regulation in the G20 grouping of major economies.

European Central Bank President Jean-Claude Trichet played down transatlantic differences, telling the Wall Street Journal the proposed U.S. reforms were “relevant and interesting” and shared the same aims as European measures.

Not all bankers were critical of Obama’s plan. The CEO of Italy’s biggest retail bank, Corrado Passera of Intesa Sanpaolo, said it was a good idea to reward banks that did less proprietary trading and lent more to the real economy, for instance by allowing them lower capital ratios.

French President Nicolas Sarkozy, a champion of regulation and state industrial policy who has demanded a “moralisation of capitalism”, was to give the keynote address later on Wednesday.

Against a backdrop of public outrage over bumper bonuses for bankers whose institutions were saved by taxpayer intervention, aides said Sarkozy would insist there must be no return to the excesses of financial speculation and deregulation.

Perhaps anticipating such criticism, Jacob Frankel, chairman of JPMorgan Chase International <JPM.N>, said there was a danger of going to the opposite extreme.

“We are falling into the trap of excessive interventionism, excessive protectionism,” the former Bank of Israel chief said.

U.S. economist Nouriel Roubini, who had warned that the 2008 financial crisis was coming, said loose U.S. monetary policy was now fuelling asset price bubbles that would cause the next bust.

“It’s become too much, too fast, too soon and U.S. monetary policy is being exported to the rest of the world,” Roubini told a forum session.

In contrast to many speakers, he said he was not concerned about over-regulation but about a return to business as usual.

In contrast to many speakers, he said he was not concerned about over-regulation but about a return to business as usual.

Some of the most high-profile bankers, including Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase’s Jamie Dimon, pulled out of this year’s Davos meeting.

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(additional reporting by Krista Hughes, Natsuko Waki, Clara Ferreira Marques and Martin Howell, writing by Paul Taylor, editing by Hans Peters)

((paul.taylor@thomsonreuters.com; +336 46487047; Reuters Messaging: paul.taylor.reuters.com@reuters.net))

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