European banks take fright

22 January 2010 By Margaret Doyle

European bank shares have fallen sharply following President Obama’s plan to rein in speculative activities. The direct impact of the Volcker rule on foreign banks in the U.S. is likely to be small. But the latest salvo heralds a more robust attitude towards all investment banks.

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European bank shares fell sharply on Friday following President Obama's proposal of a "Volcker rule" that would restrict deposittaking banks' ability to trade on their own account and to invest in hedge funds and private equity.

Those banks with big U.S. operations like Deutsche (off 5 percent in intraday trading) and Barclays (off more than 6 percent) were hit hardest by the selloff.

Analysts estimated that the worstaffected banks could see earnings per share falls in the low double digits if the Volcker rule were copied worldwide. For example, Keefe, Bruyette & Woods estimates that Credit Suisse's earnings per share could be cut by 12 percent in 2012.

Analysts at Credit Suisse thought that rival Deutsche would be hardest hit, with a 14 percent impact on 2010 pretax profits and UBS hit by 10 percent, in a worst case scenario. However, they acknowledged that the actual impact is likely to be much smaller because proprietary revenues at both Deutsche and UBS are likely to be much lower than at the peak.

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