World markets plunge on Obama bank crackdown

Markets across the UK and Asia tumbled today in the wake of President `Barack Obama’s pledge last night to wage war on American banks in the biggest regulatory crackdown on financial institutions since the 1930s.

London’s FTSE 100 index of leading shares opened 20.8 points lower at 5,335.10, continuing from yesterday’s decline of 85.70 points following the announcement of a sweeping series of measures aimed at curbing the behaviour of banks and clamping down on risky deals.

Shares in Barclays fell further today, down 4.36 per cent to 270.7p while Royal Bank of Scotland, the state-owned lender, lost 4.59 per cent to 33.37p.

Japan’s Nikkei fell 3.6 per cent, the biggest weekly loss in three months taking it to a three-week closing low. In Hong Kong, the Hang Seng Index fell 2 per cent at 20,446.32 points, its lowest level for more than three months after reaching a four-month low earlier this morning.

President Obama’s comments had already prompted heavy falls in stock markets on both sides of the Atlantic last night, and on Wall Street share prices fell by more than 2 per cent at one stage.

The radical proposals would limit the size of institutions and bar them from the most cavalier trading practices.

The President said: “We should no longer allow banks to stray too far from their central mission of serving their customers,” he said.

“My resolve to reform the system is only strengthened when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low and cannot refund taxpayers for the bailout. If these folks want a fight, it’s a fight I’m ready to have. Never again will the American taxpayer be held hostage by a bank that is too big to fail.”

Flanked by his economic advisers, he said that Wall Street banks must: halt “proprietary trading”, where banks risk huge sums predicting the outcome of future moves in the price of commodities such as oil; operate more cautiously and have more available funds; not become too large by limiting the amount of ordinary banking business they can undertake.

In Britain, the Conservatives and Liberal Democrats pounced on the President’s words, claiming that they had been calling for similar measures for some time. The Treasury said that it would study his moves carefully.

George Osborne, the Shadow Chancellor, hailed Mr Obama’s intervention as a welcome move. “I have said consistently that we should look at separating retail banking from activities like large-scale proprietary trading — and that this was best done internationally,” he said. “Coming on top of growing agreement on a bank levy, it shows that Conservatives are part of an emerging international consensus on these issues.”

Vince Cable, the Liberal Democrat Shadow Chancellor, said: “Barack Obama understands that the bonus culture in the banking system has got entirely out of hand and must be curbed. The days of excessive risk-taking on the back of taxpayers’ money must stop now. While Obama’s proposals to prevent the worst elements of proprietary trading are welcome, this is merely a halfway house.

“We must break up British banks to ensure that taxpayers are not forced to underwrite unnecessary risks and to make the system more competitive. What is clear is that we would not be acting alone — we are already lagging behind the US.”

The Treasury said that it would consider the President’s proposed reforms but there was no reaction from the Bank of England, whose Governor, Mervyn King, has indicated that he would prefer to see a separation of “casino” banking activities from traditional activities such as deposit-taking and the provision of loans.

Analysts said that the proposals, if enacted unilaterally by the US, could damage Wall Street’s standing as a global financial centre. Ralph Fogel, investment strategist at Fogel Neale Partners in New York, said: “This is going to have a tremendous impact on big-name brokerage firms. If they stop prop trading it will not only dry up liquidity in the market but it will change the whole structure of Wall Street.”

Tim Roberts, fund manager at Cavendish Asset Management, said: “Attacking the heart and soul of Wall Street is not the answer, and will not necessarily prevent other crises in the future. Hindsight is no substitute for foresight. Nor is punitive, retrospective judgment a criteria for assessing future dangers to the system.

“The consumer may have tired of paying for Wall Street’s excess and been angered by the rudest, remorseless return to health that followed. Yet smothering Wall Street will only hamper economic recovery, meaning that access to capital becomes harder for private businesses and consumers, while institutional and private investors battle with an anaesthetised market, already highly fragile.”