Obama's bank curbs mean uncertainty for markets

Barack Obama's surprise crackdown on banks last week was "the last thing that world investors needed", said Jeremy Gaunt on Reuters.

Risk appetite was already suffering due to Greek debt problems and China's clampdown on bank lending. Then on Thursday, Obama announced the 'Volcker rule'. Banks with a deposit base guaranteed by the government will not be allowed to own or invest in hedge funds and private equity, or punt their own capital. There will be further curbs on a single bank's size to tackle the danger of any being 'too big to fail'. Longer term, such reform looks sensible. But for now, it adds a "huge dollop" of protracted uncertainty, says Gaunt.

Wall Street reacted by suffering its biggest daily loss since October on Thursday almost 2%. The S&P fell 5% in the final three days of the week, while banking stocks led the FTSE 100 down by almost 3% last week. Clamping down on banks' size and trading activities is likely to "restrict the long-term growth potential in financials", says Alan Gayle of Ridgeworth. That said, the Volcker rule still has to go through Congress; it may not be implemented in this form, or at all, once lobbyists have finished with it.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

But with the American mid-term election coming up in November and the British election due by June, there is still scope for more attacks on banks. "The political appeal of picking a fight with the bankers could prove irresistible," says Peter Thal Larsen on Breakingviews. Obama's move "is an open invitation for others to follow his lead". Peter Thorne of Helvea reckons Europe could well "copy Obama". The Tories have indicated that they might limit the size of banks if they are elected. The upshot is that it's not clear how you value a bank now, as one strategist puts it.

Overall, it's the financials, which account for 23% of the world's market capitalisation, that will be directly affected by the uncertainty, says Edward Hadas on Breakingviews. A wider worry is that "vote-searching leaders" will neglect crucial steps to strengthen the global system, such as combating protectionism or reversing fiscal stimuli. Whatever the banks' fate, this "spat could hurt financial markets for months" to come.