Obama the Unilateralist

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Obama's Plan May Fail European Test

By SIMON NIXON WSJ

President Obama is making a habit of springing financial surprises. His latest plan to stop certain banks from trading on their own account or investing in hedge funds and private equity follows last week's announcement of a bank wholesale-funding levy. Despite repeated efforts by European governments to engage the U.S. in a global financial-overhaul agenda, both proposals appear to have been launched unilaterally without consultation with international partners.

Nonetheless, Mr. Obama's plans have had global repercussions. European bank stocks sold off following the announcement, with Barclays, the biggest decliner, down more than 10%. But this may be an overreaction. To the extent it is possible to guess what will emerge from Mr. Obama's two-paragraph plan, European banks don't look particularly vulnerable. Few take U.S. deposits or have access to the Federal Reserve discount window, making it hard to see how they could be caught by the new rules.

Many, including UBS, Credit Suisse Group, Deutsche Bank and Royal Bank of Scotland Group, already have largely exited proprietary trading. None are big investors in hedge funds, although some such as Deutsche Bank and Barclays continue to invest in private equity. Barclays probably is the most active in proprietary trading, but it is likely to account for less than 5% of group revenue, according to UBS.

Mr. Obama's plans to limit the size of banks and curb their use of wholesale funding, both through caps on funding and a proposed levy, may be a bigger threat to European banks, if adopted globally. True, there is no clarity on how these proposals might work in practice. Wholesale funding can take many forms, and how one measures market share of liabilities is unclear. But a global levy along the lines outlined by Mr. Obama could cost Barclays roughly half its forecast 2011 profit before tax, according to Credit Suisse.

Mr. Obama's vague plans have created uncertainty for the banking sector and, by fueling the populist backlash, heightened the regulatory risk for the whole industry. Mr. Obama's proposals may mark the start of a global debate on how to tackle the problems raised by too-big-to-fail banks, leading to a coherent international overhaul agenda.

Just as likely, Mr. Obama, by politicizing the debate and pinning his colors to one plan of action, may instead have pulled the rug from under his potential allies, making global agreement harder to achieve. No European country is likely to follow Mr. Obama's lead without global agreement. That would open up the prospect of new opportunities for regulatory arbitrage from which European banks may yet be winners.