Page last updated at 18:30 GMT, Friday, 22 January 2010

Obama's banking proposals: The impact on Europe

By Richard Anderson
Business reporter, BBC news

Deutsche Bank headquarters in Frankfurt
European banks may be affected less than US banks

After months of posturing, mud-slinging and veiled threats, the gloves are finally off.

Perhaps stung by criticism that, after one year in office, he has failed to live up to his pre-election hype, US President Barack Obama is finally taking on the might of Wall Street.

"If these folks want a fight, it's a fight I'm ready to have," Mr Obama vowed on Thursday.

The president's opening salvo, designed to stop banks taking too many risks in the future, is a four-punch combination:

  • To limit the overall size of banks
  • To ban banks from buying and selling assets with their own money, a practice known as proprietary trading
  • To ban them from dealing in hedge funds
  • To ban private equity trading, or buying and selling whole companies.

But these wide-ranging activities are undertaken by big banks across the world, and not just in the US.

European banking giants such as Credit Suisse, Deutsche Bank, BNP Paribas, Barclays, UBS, HSBC and, to some extent, Royal Bank of Scotland (RBS) are all heavily involved in these practices.

International co-operation

Indeed, bank share prices across Europe have slumped following Mr Obama's decision to confront Wall Street.

There is no groundswell of opinion in Europe to break up the banks - there just isn't the same political pressure [as in the UK and the US]
Simon Maughan, co-head of equity research, MF Global

In the UK, RBS shares fell 7.7% in Friday morning trading before bouncing back to end the day down 1.8%, while Barclays lost 6.6% before recovering slightly to close the session down 4.1%.

And UK politicians have been quick to back Mr Obama's plans, with City Minister Lord Myners saying the US proposals were "very much in accordance with the direction we have been setting".

Subject to international co-operation, shadow chancellor George Osborne said the Conservatives would impose an identical dismantling of UK banks, while the Liberal Democrats urged the government to "get on with breaking up the banks".

In Europe, Deutsche Bank shares were down 5.8% in morning trading before recovering marginally to end the week down 4.2%, while UBS closed down 3%.

But the impact of Mr Obama's proposed reforms would have less impact on European banks than on US banks, analysts say.

While proprietary trading covers a wide range of activities, the part of it that could realistically be targeted by regulation accounts for just 1%-2% of a European bank's overall revenues, says Simon Maughan, co-head of equity research at MF Global.

Equally, he argues, European banks have been winding down their private equity functions and trading less in hedge funds.

"Such reforms would be a lot less ugly for European banks than for the likes of [US banks] JP Morgan and Bank of America," he says.

European dissent

There is, however, the more fundamental question of whether similar rules will actually be introduced in Europe.

Indeed, the reaction to the US plans by European governments could be rather more subdued than that of the UK.

There has been much deeper navel-gazing in the UK and in the US than in Europe
Jan Randolph, head of sovereign risk, IHS Global Insight

Although the French Finance Minister Christine Lagarde described the US proposals as "a very, very good step forward", it is unclear whether Europe will follow the US's lead.

"The Europeans won't do it," says Mr Maughan.

"There is no groundswell of opinion in Europe to break up the banks - there just isn't the same political pressure [as in the UK and the US]. Banks in Europe are national institutions there to support industry."

He points out there was no Glass-Steagall Act in Europe, a piece of legislation introduced in the US in the aftermath of the Great Depression to separate retail and investment banking, which was abolished by President Bill Clinton in 1999.

European banks have always integrated commercial and investment operations.

"There has been much deeper navel-gazing in the UK and in the US than in Europe," agrees Jan Randolph, head of sovereign risk at IHS Global Insight.

He highlights the fact that German Chancellor Angela Merkel recently talked of vindication for the social market economy in the light of the global financial crisis that many in Europe have blamed on rampant Anglo-Saxon capitalism.

French President Nicolas Sarkozy has made similar noises.

If the US and the UK do go ahead with Mr Obama's proposals and Europe does not, then European banks stand to gain an enormous competitive advantage, analysts say.

Proprietary trading will simply move to European financial centres such as Geneva and Zurich, according to Mr Randolph.

And if UK banks in particular are broken up, they could be sitting ducks for continental rivals.

"European banks will simply gobble them up," says Mr Maughan.

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