Bank Regulation to Dominate at Davos

European Central Bank President Jean-Claude Trichet offered qualified support for a U.S. plan to rein in the size and activities of large banks, though he stressed such proposals should be coordinated globally.

In an interview with The Wall Street Journal at his office at ECB headquarters in downtown Frankfurt, Mr. Trichet also urged U.S. lawmakers to confirm Ben Bernanke for another term as Federal Reserve chairman, saying he holds Mr. Bernanke “in very great esteem,” an unusual public backing from a central banker who zealously guards his independence from politics.

The bank-reform plans the White House outlined last week “go in the same direction of our own position, namely ensuring that the banking sector focuses on financing the real economy,” Mr. Trichet, 67 years old, said in his first public remarks on the proposal. Under President Barack Obama’s plan, limits would be placed on the market share of the largest U.S. financial firms and restrictions put on proprietary trading by banks.

Bank of England Gov. Mervyn King, meanwhile, said the U.S. proposals make it clear radical reforms are on the table. Mr. King told lawmakers Tuesday it isn’t realistic to pretend a financial structure could be designed that would prevent future crises from occurring, and the more sensible approach is to make any new system resilient enough so that troubles in one section can’t bring down the rest.

Even before the financial turmoil, the U.K. banking sector was highly centralized, and the crisis has exacerbated that trend. The BOE has been pushing for discussion of more-drastic changes to Britain’s financial architecture, and Mr. King urged lawmakers not to dismiss options before they have been given thorough consideration.

“The system that has the least to be said for it is the present system, the status quo. That’s the one that’s brought us financial crises of ever-growing severity,” Mr. King said.

Several European countries including Germany and France have pushed for international consensus on a new regulatory framework for the banking system. The European approach has emphasized forcing banks to increase their capital cushion instead of restricting business activities.

Though Mr. Trichet said the ECB was “examining [the Obama proposals] with great care,” some analysts question whether Germany and France, the euro zone’s most influential members, would endorse reforms that could diminish their own universal banks, Deutsche Bank AG and BNP Paribas SA.

Mr. Trichet, who arrives Wednesday for the World Economic Forum in Davos, Switzerland, admonished bankers to remember their role in generating the biggest financial crisis since the Great Depression, and who got them out of it.

Some at financial institutions see a return to normalcy “and have forgotten that governments put over 25% of GDP of taxpayer risks on the table and that major central banks have engaged in nonconventional measures, which have been absolutely extraordinary,” Mr. Trichet said.

Banks, he said, need to restore their balance sheets by issuing new shares when possible, setting aside a “significant” portion of profits and fixing compensation practices so the financial sector can “do its job, which is financing appropriately the real economy.”

Addressing the fiscal and economic crisis in Greece, Mr. Trichet said he believed the country’s government would make good on its promise to quickly rein in its budget deficit, despite painful public spending cuts such a course would entail.

“It is what the government has committed to do,” Mr. Trichet said when asked whether a country with Greece’s massive public-sector spending could meet its deficit-reduction targets. “I trust it is not only realistic but also necessary in the present demanding circumstances to take the right decisions to meet the goal.”

In an interview Tuesday, Greek Finance Minister George Papaconstantinou detailed a diversified borrowing plan to plug the budget deficit, including hopes to raise as much as $10 billion from Chinese and other Asian investors. He also said he is confident the European Union council of finance ministers will approve the country’s deficit-reduction plan next month.

Greece’s turmoil has raised concerns that its troubles could spread to countries with exploding budget deficits, including Ireland, Spain and Portugal. Germany and other healthier euro-zone members have pressured Athens to fix its finances.

Greece has said it will shrink its deficit from almost 13% of GDP in 2009 to less than 3% by 2012. Many investors and economists doubt that ambitious timetable is possible.

Mr. Trichet called for “all data, facts and figures” to be audited nationally and “when judged necessary” by Europe’s official statistics arm. He said he expects the European Commission to take up the issue soon.

He also called for “rigorous” application of euro-zone budget rules that call for deficits to be less than 3% of a country’s GDP.

Mr. Trichet offered strong support to Mr. Bernanke, who is battling to remain Fed chairman for another four years amid criticism of his handling of the financial crisis. ECB presidents can only serve one term.

Mr. Trichet, who is due to retire at the end of his eight-year term in October 2011, has generally received high marks for steering Europe through the financial crisis.