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The City of London could see an exodus of its leading banks if the UK's authorities move to copy President Barack Obama's plan for a radical shake-up of the financial sector.
That is the view of leading trade body Association for Financial Markets in Europe, which warns that the proposals to limit trading and bust up the biggest players will merely plant the seeds for the next banking crisis by allowing firms to play “regulatory arbitrage”.
Unless there is global reform enacted across all major finance centres at the same time, banks will simply pick and choose the most lax places to do business, it is feared.
Mark Austen, acting chief executive of AFME, said today: “These proposals are crowd-pleasing vote winners but they don't address the real issues. They merely benefit the banks by giving them the ability to play regulatory arbitrage, but they don't benefit the individual on the street.”
Mr Obama's shock move last night undermines consultation between the G20 nations on how to prevent another financial mess, it is claimed. By taking the lead so dramatically in ways critics say have more to do with politics than good policymaking, America could be encouraging the growth of even more “offshore” finance centres.
“Banks will go to wherever they find the best and most friendly regime. People will up sticks and go somewhere more friendly. Most business banks do is global, so they trade Italian government bonds from the UK, for example. If it becomes better to do that from Switzerland, they will,” said Mr Austen.
Investment banks have begun lobbying intensely to get Mr Obama's proposals watered down.
Other analysts said the UK would be forced to fall into line.
Professor Stefano Harney, of the School of Business and Management at Queen Mary, University of London, said: “President Obama's announcement means the UK government will have to act to break up the banks here in Britain. Not to follow his lead would be to condemn the City of London to become the largest offshore banking colony in the world, with all the corruption and instability that would come with that.
“These banks need to be creating jobs and making loans, not making donations. And the only way they will do that is if they are broken up and forced to make money from investment not speculation.
“That is why you will see the UK government follow President Obama's initiative.”
