Last updated: January 22, 2010 7:36 pm

Obama plans fail to forge EU consensus

Barack Obama’s plans for a far-reaching overhaul of Wall Street failed to forge an immediate political consensus in Europe, as bankers at groups such as Barclays, Royal Bank of Scotland and Deutsche Bank scrambled to gauge their exposure.

The US president’s announcement of a crackdown on banks’ riskier activities, including speculative “proprietary” trading and investing in private equity and hedge funds, drew some words of support but no commitment to follow suit from Britain, France or Germany

Christine Lagarde, French finance minister, called Mr Obama’s proposals “a very, very good step forward”.

“I’m delighted to see that the president of the United States has fallen into line  . . . and [acknowledged] that regulation is crucial to control and limit excess in the banking sector.”

Worried investors sent European bank shares tumbling on Friday as concern mounted about the impact of the increasingly hostile climate as governments around the world seek to curb perceived bank excess.

While analysts were divided on which foreign banks would suffer the most if the proposals were adopted, many warned the flurry of reform was destabilising the entire sector.

“New regulations are being proposed thick and fast and the industry faces major uncertainty from these,” wrote Nomura’s Raul Sinha in a note. “The latest proposals are only a week after the announcement of the tax on wholesale liabilities. What’s next?”

Like their US counterparts, European banks have dramatically scaled back so-called “pure” proprietary trading in the wake of the financial crisis, with most claiming that it now makes up a tiny or “insignificant” portion of their earnings.

UBS analysts estimated that proprietary trading accounted for 4.9 per cent of revenue at Credit Suisse, 4.3 per cent at Deutsche Bank, 4.2 per cent at Barclays, 3.1 per cent at Société Générale and 1.4 per cent at BNP Paribas. In contrast with Wall Street rivals such as JPMorgan and Goldman Sachs, most also have more limited investments in private equity groups and hedge funds.

What is more difficult to assess is how non-US based banks would fare under restrictions that also concerned some trading carried out in connection with client activity, known in the industry as “flow”.

The plan to curb proprietary trading would cost Credit Suisse, UBS and Deutsche Bank about $6bn (€4.2bn, £3.7bn) in revenue next year, according to analysts at JPMorgan Chase, though the banks dispute that figure.

RBS, whose shares fell 2 per cent on Friday, said that it had already closed its proprietary trading desks and had very limited exposure to private equity and hedge fund investments, while Barclays was already spinning off its own private equity group, Barclays Private Equity.

In the UK, the government remained unenthusiastic but said it would examine the proposals as they were fleshed out in the coming weeks. The trading curbs were of particular interest, said one Treasury official – though that issue will also be addressed by new rules forcing banks to hold more capital.

However, London’s position is that it is already carrying out various reforms which will “de-risk” the financial system and will examine others – such as a global “Tobin tax” – at a London seminar on Monday with other G7 nations. Lord Myners, the City minister, said the US proposals were “very much in accordance with the direction we have been setting”.

The German government signalled it was sticking to plans of formulating proposals for new banking rules in the run-up to the next G20 meeting in June. Officials have for several weeks been pushing a financial transactions tax as Berlin’s favourite option – an initiative that would need global backing to work.

But Berlin has also signalled that it remains open-minded about remedies, stressing that an IMF report about legislative possibilities, due in the next few weeks, would serve as the basis for a co-ordinated, international approach.

The German finance ministry called Mr Obama’s initiative “a helpful suggestion for ongoing discussions”.

Reports by Megan Murphy, Jim Pickard, Scheherazade Daneshkhu and Gerrit Wiesmann

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