Tories back Obama banking crackdown

THE Tories pledged today to back Barack Obama's banking crackdown as they accused the Government of becoming internationally "isolated" over reform of the sector.

The US president announced proposals yesterday to separate commercial banks from investment banks, declaring that he was ready for a "fight" with Wall Street over the issue.

Responding to the plans - which sent shockwaves through world stock markets - shadow chancellor George Osborne said: "This is a welcome move by President Obama that accords very much with our thinking."

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The US proposals include a ban on retail banks from using their own money in investments, instead being limited to investing their customers' funds, and restrictions on banks' abilities to make high-risk trades.

London's FTSE 100 Index fell to its lowest level of the year yesterday as rumours of the crackdown swept the City, with banks some of the biggest victims. Shares in Barclays tumbled 6%, with Royal Bank of Scotland down 7%.

Mr Osborne said a Conservative administration would follow Barack Obama's pledge to limit the size of banks.

"I have said consistently that we should look at separating retail banking from activities like large scale propriety trading - and that this was best done internationally," he said.

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"Coming on top of growing agreement on a bank levy, it shows that Conservatives are part of an emerging international consensus on these issues.

"Gordon Brown has repeatedly opposed the specific action which President Obama has announced. He now looks very isolated as a defender of the old model of finance that he presided over for years and that went so catastrophically wrong."

City Minister Lord Myners insisted the US proposals were "very much in accordance with the direction we have been setting" and addressed issues that the British Government had already introduced reforms.

And he played down the issue of the size of financial institutions - saying it was not as much of an issue in the UK as it was for the American banking sector.

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Mr Obama's proposals come amid widespread anger at financial institutions who have been paying large bonuses to staff little more than a year after the worst of the global economic crisis.

Yesterday investment banking giant Goldman Sachs, which employs 5,500 people in the UK, revealed it paid 16.2 billion dollars (10 billion) in staff compensation and benefits for the year - a whopping 48% above 2008 levels.

But Goldman said its share of revenues paid out in salary and benefits for 2009 was 35.8% - its lowest as a public company.

Both the American and British governments have been forced to pump billions of pounds of taxpayer money into the banking sector to prop up the financial system.

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Mr Obama said he wanted to be able to prevent financial institutions getting so large they pose a risk to the economy.

He said it was not right that banks could make risky bets while at the same time enjoying the same protection which is given to regular banking services.

Under his proposals, banks would be prevented from owning, sponsoring or investing in hedge funds or private equity funds for their own profit.

Announcing his proposals at the White House, the president said: "We have to enact common sense reforms that will protect American taxpayers and the American economy from future crises.

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"For, while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near-collapse."

He added: "We have to get this done. If these folks want a fight, it's a fight I'm ready to have."

Asked whether the UK measures were as tough, Lord Myners said: "There are particular circumstances in the United States around the sheer scale of their very largest banks compared with the rest of the banking industry so that is why the issue of size has become a factor in the president's thinking.

"On the issue of the scope of banking, we are addressing the riskier activities by requiring banks to have much more capital and also having 'living wills' which would allow the failed part of a bank to be isolated and separated from the remainder of the bank.

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"The policy objectives and intention are very, very similar and we have been criticised in the past for going too far, for making London and the UK an unattractive place to base a banking industry in."

He added: "What we are seeing now is that other countries are finding their own solutions to the same problems that we have already been addressing."

Liberal Democrat Treasury spokesman Vince Cable said: "Barack Obama understands that the bonus culture in the banking system has got entirely out of hand and must be curbed.

"The days of excessive risk-taking on the back of taxpayers' money must stop now."