Uncertainty over the future shape of the banking industry and the leadership of the US Federal Reserve is threatening renewed volatility in financial markets and casting doubt over the global recovery, economists and traders are warning.
The biggest US banks are scrambling for more details from the Obama administration over who will be affected by unexpected new rules banning speculative trading and investment, while industry lobbyists are already preparing for a fight to curb the impact of a $117bn tax on banks.
After Friday's heavy falls in UK share prices, the FTSE 100 is poised to open the new trading week lower tomorrow, following a late sell off on Wall Street on Friday that was caused by concerns over the future of Ben Bernanke, who has been nominated for a second term as chairman of the Federal Reserve.
Leading British bankers were still reeling from news of the break-up reform which would, if adopted, force banks such as Barclays – which is to defer bonus payments by up to 100 per cent – and Royal Bank of Scotland to split their investment and retail operations. The Chancellor, Alistair Darling, said he had no plans for similar reforms in the UK, while the shadow Chancellor, George Osborne, supported Mr Obama's move.
Financial market volatility – as measured by the Vix index, also known as the fear index – soared last week as political uncertainty mounted in the wake of the Democrats' surprising loss in the Senate election in Massachusetts. JPMorgan Chase, Bank of America and Citigroup, which could face the greatest upheaval as they have invested heavily in hedge funds and private equity, saw their shares fall sharply after Obama's proposals.
Goldman Sachs, whose shares were down 7 per cent in two days, is warning that it may be difficult to define proprietary trading, since even trading with clients involves the bank risking its own money. It was not immediately clear whether Goldman might be affected by the prop trading ban, because, although it is regulated as a bank holding company, it does not own a retail bank whose deposits are guaranteed by the government.
The White House has also been unable to say at what level limits on the size of bank balance sheets might kick in, or even how they might be calculated. "Policy uncertainty undermines confidence in financial markets," Bank of America-Merrill Lynch strategist Jeffrey Rosenberg told clients, explaining the 52 per cent jump in the Vix last week.
Markets were further roiled on Friday as it emerged Democratic leaders were struggling to muster the 60 votes needed to push Mr Bernanke's reappointment through the Senate.
Economists and traders said they feared the politicisation of the Fed if the chairman is not confirmed, but it appeared that a vote will not be held until late this week at the earliest.
Support and opposition for Mr Bernanke does not divide along party lines. Senators in tight re-election situations appeared most reluctant to throw their weight behind him and even Democratic majority leader Harry Reid said he had not decided whether or not to vote yes.
Mr Bernanke will be replaced on an interim basis by his vice-chairman, Donald Kohn, if he is not re-elected by 31 January.