Industry and politicians face off over bank reforms

Published on Wednesday 27 January 2010 21:57

GLOBAL business leaders have warned western governments that a populist crackdown on the financial industry could hamper a fragile recovery after the worst recession since the 1930s.

The worried response to US president Barack Obama's plans to curb big banks and a British assault on bankers' pay came as 2,500 business leaders and policy makers met at the annual World Economic Forum in the Swiss ski resort of Davos.

French president Nicolas Sarkozy delivered a tirade against the excesses of financial speculation, deregulation, the bonus culture and accounting tricks, which he said had driven the world economy to the edge of the abyss a year ago.

Only concerted government action had saved the world from financial meltdown, he said, and the first glimmers of recovery should not be a signal to let up on regulatory reforms. "We can only save capitalism by refounding and moralising it," Mr Sarkozy said in his keynote address, warning central banks against an abrupt withdrawal of monetary stimulus measures that might trigger a collapse of the world economy.

Surveys produced for the conference showed global economic confidence on the rise after deep gloom in 2009 and a cautious return to hiring, especially in emerging markets. But the spectre of uncoordinated, heavy-handed regulation and government intervention in the economy was the biggest cloud on the horizon.

Uncertainties over whether China would rein in its feverish pace of growth and concerns about how Greece would tackle its debt crisis also concentrated minds in Davos.

Mr Obama jolted markets a week ago with proposals to force commercial banks to cut ties with hedge funds and private equity funds, and stop proprietary trading. He also said he wanted the financial sector to pay for a massive taxpayer bailout.

Barclays' president Bob Diamond challenged Mr Obama's effort to limit the size of big banks and restrain risk-taking.

"I've seen no evidence that suggests that shrinking banks and making all banks smaller or more narrow is the answer," he told the opening forum session. "If you step back and say large is bad, and we move to narrow banking, the impact of that on banks and on global trade, the global economy, would be very negative."

Billionaire financier George Soros said Mr Obama's plan to impose a tax on large banks was premature , while his wider proposals to rein in banks' activities might not go far enough.

US economist Nouriel Roubini, who had warned the 2008 financial crisis was coming, said loose US monetary policy was now fuelling asset price bubbles that would cause the next bust.

"It's become too much, too fast, too soon and US monetary policy is being exported to the rest of the world," he told a forum session. In contrast to many speakers, he said he was not concerned about over-regulation but about a return to business as usual.

Meanwhile, a study by accountancy firm PricewaterhouseCoopers showed business confidence bouncing back after the sharpest drop in economic activity since the Second World War, prompting more industry leaders to start hiring again.

The survey of 1,200 chief executives in 52 countries found 39 per cent aimed to hire extra staff in 2010, while 25 per cent were planning more job cuts, but that was down from nearly half who slashed jobs last year.

However, recruitment will be on a modest scale and mostly in booming emerging economies such as China and India, rather than in the developed world.