Well, that’s certainly put the cat amongst the Wall Street pigeons: President Obama’s radical suggestions to reform the biggest banks in the US – including a cap on their size and a block on them speculating with their own money – have sent shockwaves through financial markets all over the world. After big falls in Asia overnight, British banks have seen their share prices take a kicking today as investors fretted about what effect the new rules would have on this side of the pond. So far detail remains thin on the ground, and there are still lots of obstacles to surmount. But if Obama does make this happen, it could be the biggest news in the financial services sector for 70 years…
The main aim of the President’s proposed Volcker Rule (named after ex-Fed chief Paul Volcker, now one of his advisers) is to separate the boring bits of banking, like taking deposits and lending, from riskier stuff like proprietary trading, hedge funds and private equity, when the bank’s effectively speculating with its own money. He also talked (a little vaguely) about increasing oversight of the riskier products and increasing capital requirements. Obama’s argument – and it’s a good one – is that banks shouldn’t be able to take huge and potentially calamitous risks with their own money while safe in the knowledge that if everything goes pear-shaped, the taxpayer will bail them out. ‘Never again will the American taxpayer be held hostage by banks that are too big to fail,’ he raged.
Winning words, as always, but what will they amount to in practice? Well, nobody quite knows yet. The most obvious targets are the big US retail and commercial banks that also have an investment banking arm, like Citigroup and Bank of America – but they make relatively little money from this kind of activity. Goldman Sachs, which does, also enjoys the taxpayer guarantee since it became a bank in 2008 – but since it has no retail arm, will it just be allowed to convert back? (Although this would make it more expensive for it to raise money, hurting profits). Either way, the weakening of the big commercial banks might actually allow it to increase market share in other areas.
And how will this affect the other big international banks, including those in the UK? Will Barclays have to give up some or all of its highly profitable US trading business? Will other Governments follow suit? (The Tories have already said they will, as long as other countries do). Only time will tell – but these falling share prices suggest investors are worried that this signals a new crackdown on banks, however it plays out.
Obama will have a big fight on his hands to get this through Congress, because Wall Street is a powerful and influential lobby. But he needs a popularity boost at the moment, and there are few more popular causes these days than banker-bashing. ‘My administration is the only thing between you and the pitchforks,’ the President apparently told the banks at the start of the crisis. Not any more.
In today's bulletin:
Barack's bashing batters British banks
Retail sales disappoint - but frozen chickens boost Waitrose
Law firm unveils plan to retain top women
NI hike will cost companies £14bn, say business groups
Recession fraud provides rich pickings for private dicks?