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22 Jan, 2010 15:14

Global equities take hit on Obama banking plans

Global equities have taken a hit on Friday after U.S. President Barak Obama's outlined new banking regulation plans. If implemented, it could evaporate liquidity from the equity markets.

Banks are misbehaving again, getting involved in highly risky financial activities. U.S. President Barack Obama has rolled out a plan could squeeze the banks’ profit margins

If implemented, the new regulation would force financial giants like Goldman Sachs, Morgan Stanley and Bank of America out of participating in all private equity operations. Warren Buffet with his Wells Fargo might also get hit.

Aleksey Moiseev, Head of Fixed Income at Renaissance Capital says bankers have just been working within the free market system, within a regulatory environment set for them.

“Warren Buffet who said, already famously, that government mortgage agencies were managed by congress, attacked congressmen. And that really shows it all. Essentially that the government in this crisis in the United States, and particularly in Britain, actually have tried to blame bankers for all the faults. But really they were operating in the best ways of the free market economy, in regulations which were set for them.”

The G7 finance ministers are meeting in London on Monday to discuss the proposal. Russia is not taking part in the discussion, but its equity markets have already been affected. Following in the footsteps of U.S. indices, that on Thursday suffered their worst one-day percentage drop since October.

No similar measures should be implemented in Russia – its financial sector is underdeveloped compared to that of the United States, according to Garegin Tosunyan, President of the Association of Russian Banks.

“The speculative operations actually means operations that are vital for the banking sector. Without them the banks would hardly be able to fulfill their main functions. These operations also help provide adequate liquidity. In the West the derivative market poses higher risks because it's multi-faceted, whereas in Russia we still lack legislation that would govern derivatives. In Russia the division of investment and credit operation is still too early – one can't manage without either of them."

Russia initiative on the banking regulation is focused on the crisis exit strategy rather than punishing specific financial institutions according to Finance minsiter Alexey kudrin.

Easier regulation that in the United States can also help Russia evolve as a financial center, with top financial institutions looking for easier, more relaxed environment.