Stocks dive on US banking proposal

World markets retract as Barack Obama announces sweeping proposals to curb the size and activities of banks.

Stock markets from Tokyo to London tumbled yesterday on US President Barack Obama's sweeping proposals to curb the size and activities of banks. Coupled with prospects of China introducing more measures to slow its economic growth, the announcement sent the Asian and European markets tumbling, with major banking stocks trading in the red. Overnight, the US Dow Jones industrial average fell 2 per cent while Japan's Nikkei closed at a three-week low.

Europe's Dow Jones Stoxx 600 banking index declined for a third day, slipping 1.4 per cent to 249.14 at about midday in London. Deutsche Bank, Germany's largest lender, and UBS, Switzerland's biggest bank by assets, slid more than 5 per cent. ICAP, London Stock Exchange Group and Deutsche Boerse dropped more than 3 per cent. Mr Obama, speaking after European markets closed on Thursday, plans to limit the size and trading activities of financial institutions as a way to reduce risk-taking and prevent another financial crisis. The proposals would prohibit banks from solely trading for their own profit - known as proprietary trading - and sponsoring hedge funds and private equity funds.

"While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse," he said. "Never again will the American taxpayer be held hostage by banks that are too big to fail." His proposals could affect trading at some of the biggest US banks, posing "a question on the long-term evolution of the financial industry", Guillaume Duchesne, a Luxembourg-based equity strategist at Fortis Private Banking, told Bloomberg. "Profitability will be constrained with stricter regulation. That doesn't favour the industry."

Wall Street was yanked lower by heavy selling in bank stocks after the announcement. The Dow fell by its biggest percentage drop since October 30 to 10,389.88. The broader Standard & Poor's 500 index fell 1.9 per cent to 1,116.48, while the Nasdaq composite index fell 1.1 per cent to 2,265.70. Asian equities reacted strongly to the slump on Wall Street. Japan's Nikkei 225 fell 2.6 per cent, Australia's S&P/ASX 200 lost 1.6 per cent, China's Shanghai Composite dropped 1 per cent, South Korea's Kospi gave up 2.2 per cent, Hong Kong's Hang Seng index shed 0.7 per cent per cent and Taiwan's main index shrank 2.5 per cent. India's Sensex and Singapore's Straits Times both lost 1.1 per cent.

Markets in the GCC were closed for trading yesterday. They will reopen tomorrow. [e-mail]