Mixed response

Obama's dramatic proposals, announced on Thursday and reiterated in speeches on Friday, have the potential to alter the world financial order but experts criticized their lack of detail.

Obama outlined a tough financial reform program that would limit the "excessive" risk-taking, blamed for the financial crisis, which drove the world's biggest economy into its worst recession in decades.

Global stocks plunged amid concerns about Obama's sweeping bank reform: the US stock market suffered a big selloff for the third consecutive day, while European shares dropped to post their worst weekly close in nearly three months.

EU unlikely to imitate

An unnamed EU source told Reuters news agency on Friday that the European Union will not imitate Obama's plan because it aims to reduce risk in the sector through other means.

"We understand the US position and we understand his reasons, but I can't see the EU going down this route," the source, who is close to EU financial policymaking, said. "The US finds itself a little behind us on this. The Obama plan is not fit for the purpose in the EU."

The EU source said the 27-nation bloc would focus on raising banks' capital requirements and tightening financial regulation, pursuing initiatives already under way in the European Parliament.

"What is key to remember is that the US is one market, the EU is 27 markets and we are trying to encourage cross-border financial services and more importantly consolidation in both national and trans-national markets. The Obama plan would be anti-competitive in EU terms."

The source said most top banks in the world were American or had roots there, so it was understandable that Obama wanted to curb their size.

"The EU does not have so many 'too big to fail' institutions, to be honest. Also, we have already started restructuring our banks, forcing them to downsize, sell off units and open up to newcomers."

Obama's plan would prevent banks from investing in, owning or sponsoring a hedge fund or private equity fund. It would also set a new limit on banks' size in relation to the overall financial sector and could also bar institutions from proprietary trading operations, which are unrelated to serving customers, for their own profit.

Proprietary trading involves firms making bets on markets with their own money and has been the source of much of banks' bumper profits before and after the financial crisis.

Europe reacts

The EU's economic affairs commissioner Joaquin Almunia called Obama's plan "very justified."

"We all have the impression that financial entities in Wall Street have not yet learned all the lessons from the crisis, so I think the measures adopted by the US president are very justified," Almunia told an audience of Spanish journalists in Brussels.

But Almunia - who is to become competition commissioner in the next EU executive, and set to enter office on February 10 after a vote of confidence of the European Parliament - explained that Europe faces different challenges in regulating its financial sector.

French Economics Minister Christine Lagarde also welcomed the proposal, saying it was a "very, very good step forward," while UK Treasury Minister Paul Myners said Britain had already acted to address problems in its banking industry.

"He's developing a solution to what he sees as the American issues, we've already taken the necessary action in the UK," Myners said in a TV interview.

bk/Reuters/AFP/dpa
Editor: Rick Demarest