10:57pm UK, Thursday January 21, 2010

Ed Merrison, Sky News Online

Shares in Barclays and RBS tumbled as Barack Obama announced a radical shake-up of Wall Street that sent shockwaves around world stock markets.

The US President announced sweeping moves aimed at barring banks from using retail deposits to gamble on risky investments.

He would also try to prevent them growing so large that their collapse could bring down the entire system.

He promised to push the reforms in Congress, even if Wall Street launched a campaign to block them.

“If these folks want a fight, it’s a fight I’m ready to have,” he said defiantly.

“Never again will the American taxpayer be held hostage by a bank that is too big to fail,” Mr Obama said at the White House.

Mr Obama called for federal authorities to limit the size of the risks taken by banking giants so that never again do they threaten the security of the entire financial system.

The Dow Jones shed more than 2% after the President’s speech, while shares in UK banks RBS and Barclays fell 7% and almost 6% respectively.

Sky’s Jeff Randall said: “This is a really big deal.

“The stock market thinks that those banks that have operations in the States – RBS and Barclays – are likely to be hit and they’re going to be split up over here.

“It could well mean a new phase of regulation.”

The move also poses a headache for Gordon Brown, who has insisted Britain stands shoulder-to-shoulder with the US in leading the way on regulation.

The Prime Minister and City watchdog the Financial Service Authority have insisted splitting the banks’ retail and investment operations was not the right course of action.

David Cameron, who favours giving greater regulatory control to the central bank, agrees with Bank of England Governor Mervyn King that the move is necessary to prevent systemic risk.

Randall added: “If the Conservatives do win the next election I’d be amazed if they don’t go down this route, giving Mervyn King more power and splitting up those banks between casino banking and retail banking.”

A Wall Street lobby group argued the proposals made by Mr Obama were the wrong way to reduce financial risk.

They would effectively force firms to choose between proprietary activities – trading in stocks and sometimes risky financial instruments, and commercial activities – like making loans and collecting deposits.

“We believe providing for strengthened regulatory oversight, and flexibility like that originally proposed by the administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk ending ‘too big to fail’,” the Securities Industry and Financial Markets Association said.

Following the news, Goldman Sachs Group, one of Wall Street’s top earners, dropped sharply despite

The President argued that without new restrictions, the sector would continue to operate under the same rules that led to its near collapse.

He promised to push the reforms in Congress, even if Wall Street launched a campaign to block them.

“If these folks want a fight, it’s a fight I’m ready to have,” he said defiantly.

US stocks reacted negatively to the announcement, with the Dow Jones falling nearly 2%, and Europe’s stock markets, closing just as the announcement was made, also dropped.

A Wall Street lobby group argued the proposals made by Mr Obama were the wrong way to reduce financial risk.

They would effectively force firms to choose between proprietary activities – trading in stocks and sometimes risky financial instruments, and commercial activities – like making loans and collecting deposits.

“We believe providing for strengthened regulatory oversight, and flexibility like that originally proposed by the administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk ending ‘too big to fail’,” the Securities Industry and Financial Markets Association said.

Following the news, Goldman Sachs Group, one of Wall Street’s top earners, dropped 5.4% per share despite reporting better-than-expected full-year results earlier in the day.