Facing Flak After Obama’s Bank Restrictions

Facing heavy flak from critics who have dubbed his first term “disappointing,” President Barack Obama is taking steps to reform Wall Street. In a statement on Thursday, Jan. 21, Obama let Wall Street know that he is not afraid to throw some punches. “If these folks want a fight, it’s a fight I’m ready to have.”

Obama plans to slap four big restrictions on U.S. banks to stop them from taking too many high-risk investments. The restrictions include limiting the overall size of banks, banning banks from buying and selling assets with their own money-a method known as property trading-banning banks from dealing in hedge funds-and banning all private equity trading-or buying and selling whole companies.

Obama’s restrictions will have far-reaching repercussions that go beyond our borders. The big banks of the United Kingdom and Europe such as Credit Suisse, Deutsche Bank, BNP Paribas, Barclays, USB, HSBC, and the Royal Bank of Scotland all participate in the practices Obama plans on restricting.

Prices have already started to drop moderately across Europe in response to Obama’s promise. Despite the market taking early hits, Obama’s plan has garnered support from U.K. politicians. City Minister Lord Myners praised Obama’s action, saying that it is “Very much in accordance with the direction we have been setting.” Analysts say that the proposed changes would have a much greater impact on the U.S. market than on European banks. Simon Maughan, BBC co-head of equity research at MF Global, thinks that although property transactions cover a wide range of trading, it could realistically be targeted by regulation accounts for just one to two percent of most European banks overall revenues.

He also disputes European banks have been winding down their private equity and trading less in hedge funds. Maughan also states that, “Such reforms would be a lot less ugly for European banks than for the likes of [U.S. banks] JP Morgan and Bank of America.” 

Now, the big question is whether or not similar rules will be enacted in Europe.  Despite support from French Finance Minister Christine Lagarde, who, according to BBC, called the proposals, “a very, very good step forward,” it still remains uncertain whether Europe will follow suit and pass similar restrictions.

Maughan does not think that Europe will pass anything because they are not under the same political pressure as the U.S.

Analysts say that if the U.S. and U.K. pass Obama’s restrictions, Europe will gain an enormous competitive advantage. If banks in the U.S. and U.K. are broken up, they could become bait for European rivals. Maughan worries that if European banks do not cooperate, “European banks will simply gobble them [U.S. and other foreign banks] up.”
Despite concerns about foreign support, the Obama administration remains optimistic that their proposals will help the current problems on Wall Street.