THE BATTLE lines were drawn on the opening day of the Davos economic summit on US president Obama’s plans to limit the size of banks and restrict the investment activities of retail banks.
Senior bankers warned that the proposals would damage the world economy, while political and public figures gave them a guarded welcome but cautioned against isolated moves by governments to overhaul regulation and eradicate risk-taking by their national banks.
In an opening address to the five-day summit, French president Nicolas Sarkozy supported the US plans to curb the banks’ ability to engage in proprietary trading but warned that the reforms should be introduced in a concerted, global approach led by the Group of 20 leading nations.
“Obama is right when he says that banks must be dissuaded from engaging in proprietary speculation or financing speculative funds. But this debate cannot be confined to a single country, whatever its weight in global finance. This debate must be settled within the G20.”
Among Mr Obama’s measures was a proposal to prohibit banks that hold customer deposits from owning or investing in highly leveraged hedge funds or private equity funds.
Devising safeguards to prevent a future collapse of the global financial system has dominated the opening discussions at this year’s annual meeting, which is being attended by 2,500 delegates, including 30 heads of state and government, 12 central bank chiefs and 1,400 business executives.
Bob Diamond, president of Barclays, warned that there was “no evidence that shrinking banks is the answer” and said the Obama plan could affect jobs, growth and world trade.
A new era of “narrow” banks would be harmful, he said. Large, universal banks were created by market forces in a post-communist world, he said. “They fulfilled an important function in helping governments and corporates to transfer risk, particularly across borders,” said Mr Diamond.
Josef Ackermann, chief executive of Deutsche Bank, and Peter Sands, chief executive of UK bank Standard Chartered, cautioned against using different approaches to regulating banks in different countries, saying that it would lead to “regulatory arbitrage” and damage the global economy.
“The international community should try to resist that as long as possible,” said Mr Sands, chief executive of one of Britain’s Big Five banks, adding that it would increase costs and complexity with different countries following different regulatory systems.
“Will it help the recovery for big banks to be broken up? The unambiguous answer is no,” he said, adding that some business may move to unregulated markets.
Dr Ackermann said that small players in the financial sector meeting the needs of global trade and production would not benefit the global economy. “We are in a global financial market and we need a level playing-field. It would not be productive to have different regulatory frameworks,” he said.
The focus should not just be on protecting individual banks or national banking systems, he added.
Speaking at a private lunch, billionaire investor George Soros told journalists that he supported Mr Obama’s plans but that they were premature and did not go far enough. He warned that any investment banking divisions spun off from commercial banks would still be “too big to fail”.
“The timing of it is wrong – there is no urgency to introduce these long-term reforms,” he said.
Telecoms entrepreneur Denis O’Brien flew in to discuss emergency measures to help Haiti following this month’s earthquake.
Telecoms entrepreneur Denis O'Brien flew in to discuss emergency measures to help Haiti following this month's earthquake.
