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Obama bank reform agenda to dominate in Davos

U.S. President Barack Obama's controversial proposal to overhaul banking regulation in the United States is being met with some resistance by global policy makers as they prepare to meet this week in Davos, Switzerland, and again next week in Iqaluit.

The U.S. reforms, along with various other proposals to recoup some of the billions in bank bailout money through a tax or levy, will dominate talks this week in Davos, as Wall Street bankers quietly lobby to ensure they're watered down. The proposals will also figure prominently in Iqaluit, when Finance Minister Jim Flaherty hosts the first major gathering of Group of Seven central bankers and finance ministers in a year in which they'll try to leave the global recession behind and chart a self-sustaining recovery.

That will include measures to prevent another near-collapse of the financial system, which Bank of Canada Governor Mark Carney last week said would form "the heart of the discussion" in Iqaluit.

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Canadian and British policy makers have suggested Mr. Obama is missing the mark with his plan to limit banks' size and some of their activities. French and German officials say he's going in the right direction, but have stopped short of pledging to mimic any of the specifics.

Behind the scenes, analysts said Mr. Obama's officials may reassure other countries that the President is flexible about the details of his proposal and that it is aimed at American voters, who are angry about the billions in bailout money given to Wall Street firms that have returned to record profits while U.S. unemployment hovers around 10 per cent.

Philip Swagel, a former U.S. Treasury Department official who teaches at Georgetown University in Washington, said G7 officials would be wise not to worry too much about whether Mr. Obama's boldest proposals will see the light of day, let alone fret about the U.S. gaining - or even seeking - enough global support that other countries end up having to replicate the measures.

"It's not that they're dead on arrival, they were never intended to be initiatives to push forward in the international agenda," Mr. Swagel said in an interview. "They were aimed at domestic consumption, signalling to the American people that the President is as mad as they are."

Meanwhile, officials from the Group of 20 nations, which also includes major developing nations such as China and India, as well as a Swiss-based body of banking regulators, have argued their efforts to craft new global rules for finance will accomplish similar goals as Mr. Obama's.

"There's no way that the G7 or any larger or smaller group is going to agree to these rules, because the Japanese like the fact that they have big banks; so do the Chinese and the Germans," said Robert Litan, an economist and former Clinton administration official who's now a senior fellow at the Brookings Institution in Washington. "I just don't see other countries going down the same road."

Mr. Obama last week proposed limiting banks' growth, so their failure doesn't risk taking down the rest of the financial system, and also making it illegal for most deposit-taking institutions to trade on their own behalf. Both measures aim to lower banks' exposure to risky securities such as those linked to subprime mortgages.

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The Bank of Canada's Mr. Carney hasn't come out explicitly against the proposals. But in an interview with the Financial Times, he advocated creating conditions where institutions "can fail in an orderly fashion" and indicated the "quality of capital" a bank has is more crucial than its size to the health of the financial system and the larger economy.

Alistair Darling, Britain's Chancellor of the Exchequer, has put forward a similar argument, telling the Sunday Times that forcing dangerously big lenders to break into more manageable entities "isn't the point. The point is the connectivity between them in relation to their financial transactions."

French Finance Minister Christine Lagarde said Sunday that Mr. Obama's proposal jibes "completely" with positions France has advocated within the G20's discussions. Germany has said it has no plans to make its biggest banks split apart, but will instead focus on implementing whatever the G20 agrees to.

And that is probably what central bankers and finance ministers know will be the end result of discussions about how to better police the global financial system, Mr. Swagel said. Mr. Obama may push his plans vigorously for the benefit of U.S. audiences, he said, even as his officials privately make it clear to their counterparts that they're more of a sideshow.

"The point is more political rhetoric," Mr. Swagel said.

With files from Bloomberg and Dow Jones

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Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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