Britain's banks yesterday urged the Government not to join Barack Obama's war against Wall Street amid a day of violent price swings on the world's stock markets.
Their warning came as the City minister, Lord Myners, prepared to host a seminar on Monday which will bring together finance ministry officials from G7 nations including the US, the International Monetary Fund and the Financial Stability Board. The Bank of England and the Financial Services Authority will also attend the summit, where a possible levy on banks to create a "rescue fund" for future bailouts will be discussed.
President Obama's announcement of his plans on Thursday initially caused panic on the stock markets as investors speculated about their possible impact on bank earnings. Mr Obama wants to prevent banks from engaging in risky activities such as proprietary trading – making bets with their own cash – and private equity.
While the Government sought to calm fears that Britain would follow suit, investors' fears were further stoked after the Conservatives offered support for the plans. The shadow Chancellor, George Osborne, said in a radio interview: "The President of the US proposing this creates a lot of space for the rest of the world to come up with what will be a sensible system of rules and agreements."
At one point yesterday, Barclays – the British bank which is seen as likely to suffer the most damage from a crackdown because of its substantial investment banking activities in the US – lost a shade below 10 per cent of its value, while Royal Bank of Scotland gave up 8.6 per cent. One banker said: "You can understand why investors are nervous. They just don't know what the US Government is going to do next. It has introduced a huge degree of uncertainty. There is no clarity on how these proposals will work."
Money brokers also suffered falls amid fears that they too face a severe hit to their profits, while billions of euros were wiped from the value of European banks. However, a late rally saw much of the losses pared back and Barclays closed down just 11.65p at 271.35. RBS ended just 0.64p lower at 34.6p, Icap fell 28p to 397.7p and Tullett Prebon was 19.8p lower at 310.1p. Lloyds, which has no investment bank, closed 0.3p higher at 53.6p but HSBC eased back 1.4p to 673.6p.
Angela Knight, the chief executive of the British Bankers' Association, insisted that the UK, unlike the US, had done much to reform its banks. "We have made an awful lot of changes already in terms of banks holding more capital and stabilising the risks that they face. The US has yet to get started on these issues," she said.
Mrs Knight warned that banning banks from private equity could hamper "debt for equity" swaps, where struggling companies issue shares to banks when they cannot repay loans. "That is a key way of helping struggling companies and could be put at risk by what the President is suggesting," she said. She also warned that banning some forms of risky activities could create hugely risky companies outside the banking system.
"Remember, universal banks such as HSBC and Barclays survived and show the strength of the universal banking model. It was a risky, pure investment bank failing – Lehman Brothers – that caused many problems."
The investment banks' trade body, the Association for Financial Markets in Europe, said: "We support responsible reform over ill-advised and arbitrary restrictions on growth and activities. We hope Europe will continue to proceed carefully and thoughtfully toward a rigorous and flexible regulatory framework that does not impede recovery and economic growth."Reuse content