Bank Curbs Likely to Spread To Other Countries: El-Erian
Washington's efforts to clamp down on big banks are likely the first in a line of global moves to curb risk-taking in the financial sector, Pimco's Mohamed El-Erian said.
Speaking the day after President Obama proposed sweeping changes in the way the nation's largest financial institutions operate, El-Erian told CNBC that taking on the banks is the easiest way for policymakers to show they are addressing the problems with the global financial crisis.
"We as investors have to be able to navigate these new factors, because that's the reality," said El-Erian, CEO at the world's largest bond fund. "This thing is going to intensify. You're going to read about it in other countries."
He said the combination of political pressures, public anger, the high visibility of banks and the need to raise revenue are driving actions where "we should be looking at a period where the de-risking of banks is going to intensify not only in the US but globally."
"There were cracks that were exposed by the crisis, cracks in the foundation. They were hidden by a tremendous cyclical response," he said. "What's happening now is these cracks are reappearing. If you look around the world you'll see there's now a shift from this massive cyclical support to, 'Let's try and look at the underlying factors.'"
As for what form the reduction of risk in banks ultimately takes, he predicted it will be less from taxation and more from increases in capital requirements. China has already taken steps to make banks keep more cash on hand.
El-Erian compared the situation to a highway crash where the first reaction is to lower the speed limit until it becomes apparent that the new limit is too low.
"In the eyes of the world this may be a less efficient system, but it is the more stable system," he said.