DAVOS, Switzerland: Bankers on Wednesday hit out against over-regulation, with the head of British giant Barclays warning that cutting big banks down would hurt employment and the economy.

While politicians including French President Nicolas Sarkozy said he backed US clampdown plans, others like China’s deputy central bank chief Zhu Min saw no reason for the finance industry to chase overly high returns on equity.

In a keynote speech Sarkozy told the World Economic Forum’s annual meeting: “The banker’s job is not to speculate, it is to analyse credit risk, assess the capacity of borrowers to repay their loans and finance growth of the economy.”

But finance chiefs gathered in the Swiss ski resort of Davos defended big banks, saying that they played an important role in the economy.

“I have seen no evidence… to suggest that shrinking banks and making banks smaller and narrower is the answer,” Barclays president Robert Diamond said.

Diamond said banks had become big because they were “following the market, following free trade initiatives and have been providing an important function” helping to transfer risks across borders.

If banks become smaller, the “impact of that on jobs, on the economy, in particular global trade and on the economy, that would be very negative,” he warned.

Institutions such as banks that are regarded as “too big to fail” were at the forefront of the financial crisis that erupted in 2007.

Some financial groups were found to be so large and so tightly woven into major economies that governments had to inject hundreds of billions of dollars to save them from bankruptcy instead of letting them fail.

Since the crisis, besides working towards an internationally agreed process to allow for the winding down of major financial firms hit by a crisis, regulators are also considering whether big banks need to be scaled down.

US President Barack Obama last week announced plans to limit banks’ activities, forcing them to choose between proprietary activities such as trading in sometimes risky financial instruments for their own benefit – and traditional activities, like making loans and collecting deposits.

Diamond criticised Obama’s proposals, saying that it was difficult to differentiate proprietary from traditional activities.

Pointing to the bond market, he said Barclays was a key player in the market in which US bonds are also traded.

“There’s a real need for banks like Barclays which has the number one market share with the government to be an active trader,” he said.

Lord Levene, chairman of insurer Lloyd’s, meanwhile called on regulators to allow the industry to right itself. “The industry has to deal with it itself. That’s where we’re going to get recovery,” he said.

During the same discussion, JPMorganChase chairman Jacob Frenkel also warned that the serious economic crisis was “a breeding ground for potentially bad policies.”

While agreeing that government intervention had prevented a meltdown during the crisis, he argued that there was a “danger however in excessive interventionism.”

But politicians and central bankers made a strong case for tighter regulation.

“Both political and business leaders – particularly bankers – are called on to leave the champagne on ice for the time being, live up to their responsibilities and contribute to policies that are more conducive to sustainable and balanced growth,” said Swiss President Doris Leuthard.

“We cannot go back to practices before the crisis: that would be going forward into the past,” she added.

AFP/de, 27 January 2010

Bank failures, recovery, unemployment, US