Bank rules unlikely to hurt big institutions

NEW YORK (AP) — President Barack Obama’s latest broadside against big banks may have more bark than bite.

Obama’s plan to limit banks’ size and risky trading has spooked investors, but analysts say it would have only marginal effect on institutions like JPMorgan Chase, Bank of America and Citigroup — and would be hard to enforce. And it’s not clear the rules would reduce taxpayers’ risk of having to bail out another big bank.

The White House has yet to provide details of the plan outlined Thursday. But attention has centered on Obama’s effort to bar the biggest banks from doing what’s called proprietary trading. That’s when banks use their own money to make high-risk bets. If those bets go bad and a bank goes under, taxpayers could be on the hook.

Fearing the Obama plan might reduce bank earnings, investors reacted by dumping financial stocks Thursday, helping send the Dow Jones industrial average down 213 points. The pessimism continued Friday, with the Dow losing more than 216 points. Also weighing on the market were corporate earnings reports that failed to meet investors’ expectations.

The proposed overhaul marked Obama’s latest effort to more tightly police the nation’s largest banks. Last week, the president proposed a tax on banks to recoup billions in bailout money that was handed out at the height of the financial crisis in 2008.

The moves come as banks face increasingly hostile rhetoric from Obama. The president has called bankers “fat cats” and vowed to defeat the banking industry’s lobbying efforts against financial reforms.

Still, several analysts called Wall Street’s reaction to the latest proposals overkill.

One reason is that most big banks derive only a tiny fraction of their revenue from proprietary trading. At JPMorgan Chase & Co. and Bank of America Corp., for instance, proprietary trading brings in 1-2 percent of revenue, according to a Citigroup report. Less than 5 percent of Citi’s revenue comes from proprietary trading. The figure is 3-4 percent for Morgan Stanley and less than 1 percent at Wells Fargo & Co.

“Proprietary investment restrictions probably won’t have a huge impact on most banks,” said Douglas Elliott, fellow at Brookings Institution and a former investment banker. “That’s a pretty small part of what banks do.”

Elliott said much will depend on how lawmakers write the legislation, which has yet to be put even in draft form.

Citing banks’ limited proprietary trading activity, Citigroup analysts Keith Horowitz and Ryan O’Connell said in a note that the effect of Obama’s proposal “may be less severe than expected.”

The banking industry has reacted sourly to Obama’s proposal. Edward Yingling, president and CEO of the American Bankers Association, said his members are “very concerned” about it.

One worry is how the limits on a banks’ size would affect their competitiveness against large foreign rivals like Barclays Plc, Royal Bank of Scotland and Deutsche Bank. Of the biggest 50 banks in the world by assets, only six are U.S.-based, Yingling said.

SDLqWe’ve been a world leader in financial services, and we need to be very careful about doing something to undermine that,” he said.

Several U.S. banks said they need more details of Obama’s plan before they assess its effect. Bank of America said it’s already acted to scale back risk. That includes no longer issuing complex financial products known as derivatives, spokesman Scott Silvestri said.

At Wells Fargo, proprietary trading “is a non-issue,” spokeswoman Julia Tunis Bernard said.

“Products and services that help our customers succeed financially are core to our business, not risky proprietary trading,” she said.

Obama’s proposal would also prevent banks that take federally insured deposits or that borrow from the Federal Reserve from owning or investing in hedge funds or private equity groups. That raises questions about JPMorgan’s ownership of Highbridge Capital, a London-based hedge fund.

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