President Barack Obama said that he wants to make the financial system safer by taking some regulatory steps for the banking sector. He recommended preventing the biggest banks from taking excessive risks.

The president said that the big banks should not be allowed to own, sponsor or invest in hedge funds. He further suggests limiting the overall size of the banks, banning them from proprietary trading and also restricting them from private equity trading, or buying and selling whole companies.

He has come out in open to challenge the Wall Street in an attempt to clean up the business environment. He said, "If these folks want a fight, it's a fight I'm ready to have," on Thursday.

The activities Obama wants to restrict the banks from doing are usually undertaken by big banks across the world and not just in the US.

Various firms have reacted to the announcement from the president. Tom Sowanick of the Omnivest Group expressed that the regulations would require firms like Goldman Sachs to give their character while Ralph Fogel of Fogel Neale Partners expressed concerns about the liquidity in the markets.

Stephan Hess of Brookings Institution said the move has no connection with the elections in Massachusetts. Christian Cooper of RBC Capital markets said that the regulations would bring risks and Todd Colvin of MF Global said that the move was nonetheless expected from the president.

Reactions across Europe

As a reaction to the announcement of the US president, the shares of major banks across Europe dropped. In the UK, shares of RBS and Barclays fell 7.7% and 6.6%, respectively, on Friday. While in mainland Europe, Deutsche Bank shares were down 5.8%, and UBS fell 3.7%.

The political reaction to the announcement was favorable and was seen as in accordance with the government's view on the issue.

Analysts expect the regulations to cause more trouble for banks across the Atlantic in US than in Europe. They said the European banks have already been winding down their involvement in equity trading and are also trading less in hedge funds.

The main issue would be whether the governments in Europe will emulate the developments in the US and impose similar restrictions on banks.

Along with the favorable response from the UK, the French Finance Minister described it as "a very, very good step forward."

Analysts however believe that similar restrictions are unlikely in Europe as the banks are usually national institutions that support industry. The banks in Europe have always integrated commercial and investment operations.

Analysts believe that if the US and UK implement these restrictions and Europe does not then they banks in Europe will gain significantly from the development as Proprietary trading will move toward the financial centers on the continent, such as Geneva and Zurich. And if the banks in UK are split then they will be too small to compete with the banks in Europe.