How will Obama's banking proposals effect Europe?

Obama's banking proposals

President Obama clearly wants to make his mark as he celebrates his first year anniversary in the White House, but it seems his plans aren't just going to impact the US, as speculation that his proposed banking system overhaul will be felt across Europe too heats up.

Obama has big plans to shake up the banking system - a plan to prevent a repeat of the economic crisis which has been felt across the world."If these folks want a fight, it's a fight I'm ready to have," the President reportedly vowed.

Obama's plans to stop banks taking risks are:

• To limit the overall size of banks.
• To ban banks from buying and selling assets with their own money, a practice known as proprietary trading.
• To ban them from dealing in hedge funds.
• To ban private equity trading, or buying and selling whole companies.

Hpwever, European banking giants such as Credit Suisse, Deutsche Bank, BNP Paribas, Barclays, UBS, HSBC and, to some extent, Royal Bank of Scotland (RBS) are all heavily involved in these practices.

Share prices fall

As the news hit of Obama's intentions, bank share prices fell across Europe. In the UK, RBS shares fell 7.7 percent in Friday morning trading, while Barclays lost 6.6 percent.; across Europe, Deutsche Bank shares were down 5.8 percent, while UBS fell 3.7 percent.

UK politicians have been very quick to praise Obama's plans. City Minister Lord Myners said how the US proposals were "very much in accordance with the direction we have been setting."

Despite the drop in shares, analysts are saying that Obama's reforms will have less of an effect in Europe than they will in America.

"While proprietary trading covers a wide range of activities within a bank, the part of it which could realistically be targeted by regulations accounts for just one percent to two percent of a European bank's overall revenues," said Simon Vaughan, co-head of equity research at MF Global, to the BBC.

Equally, he argues, European banks have been winding down their private equity functions and trading less in hedge funds.

"Such reforms would be a lot less ugly for European banks than for the likes of [US banks] JP Morgan and Bank of America," he said.

Will the rules be introduced in Europe?

Politicians in France, Britain and Germany cautiously welcomed the US plans as a way to cut banking risk but it was by no means clear whether they are willing to go as far as Obama.

"The Europeans won't do it," said Vaughan. "There is no groundswell of opinion in Europe to break up the banks - there just isn't the same political pressure [as in the UK and the US]. Banks in Europe are national institutions there to support industry."

European banks have made efforts to cut their balance sheets, in part due to major losses and financial aid packages.

The latest Obama plans come after a rush of regulation for banks in Europe following government-led bailouts and financial aid packages across Europe, including a Swiss one for UBS. The Swiss National Bank and Switzerland's regulator have been quick to push for limits on leverage ratios for UBS and Credit Suisse, as well as to force the two major banks - on which the Swiss economy relies heavily - to better cushion their capital, The Wall Street Journal states.

If the US and the UK do go ahead with Obama's proposals and Europe does not, then the European banks stand to gain an enormous competitive advantage, analysts say.

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