By Sven Egenter and Sumeet Desai
The Swiss central bank called on Thursday for powers to break up banks deemed "too big to fail", joining London and Washington in demanding regulation to ensure institutions look after themselves in any crisis.
Over the nearly two years since defaults on U.S. mortgages triggered a banking crisis that spread across the globe, governments have poured trillions of dollars into the financial system to prop up banks and safeguard people's savings.
The world economy has yet to recover, with millions losing their jobs. The U.S. Labor Department said 608,000 U.S. workers filed new claims for jobless benefits last week, 3,000 more than the previous week, but recorded the first drop in continuing claims since January. The euro zone said this month it had lost a record 1.22 million jobs in the first three months.
The International Monetary Fund has called on Europe to make "more convincing efforts" to fix banks to safeguard the economy and adopt measures employed in the United States to ensure they have enough capital to weather any repeat of the crisis.
The Swiss National Bank said in its stability report that Switzerland might have to create rules to split off parts of its dominant banks, UBS and Credit Suisse, if the economy worsened. The two hold over $3 trillion in liabilities — about six times Swiss gross domestic product.
"The state of the Swiss and international financial system is — and remains — vulnerable overall," SNB Vice-Chairman Philipp Hildebrand told a news conference in Berne.
"The situation for the big banks appears more difficult. In addition to the still sizeable market risks, they face significant credit risks overall."
The debate over financial regulation has pitted nations against each other but also central bankers against politicians, who do not want to drive bankers from their countries but want to appease anger over taxes being paid to save their jobs.
BRITAIN ROW
In Britain, Bank of England Governor Mervyn King said on Wednesday that banks considered too big to fail may be larger than regulators should allow — a point swiftly played down by British finance minister, Alistair Darling.
"If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big," King said in the text of his remarks to the annual Mansion House speech to City of London Financiers.
Darling instead said the fix should be system-wide, pushing for more transparency, stronger national and international regulation, better means of dealing with failures and a greater focus on system-wide risks.
Washington has forced banks to boost their capital cushions to ensure they could weather any future economic downturn, instituting "stress tests". On Wednesday, U.S. President Barack Obama laid out his vision for regulation.
"We are called upon to recognise that the free market is the most powerful generative force for our prosperity — but it is not a free license to ignore the consequences of our actions," Obama said.
European Union leaders will approve new rules to tighten supervision at a two-day summit starting on Thursday, to safeguard an economy they said was deep in recession.
"Much valuable work to mitigate the consequences of the crisis has already been carried out, but it is crucial to keep up efforts," Czech Prime Minister Jan Fischer, whose country holds the EU presidency until the end of this month, wrote in an invitation letter to leaders.
POOR DATA
Consumer sentiment in Europe has risen in recent months, but industrial data and company results have shown the depth of the recession ushered in by the financial crisis.
In Britain, retail sales fell in May while public borrowing reached a record high, official data showed. A business group predicted the British economy would contract by 3.8 percent this year and make only a muted recovery in 2010.
That chimed with a report from the Italian employers' federation, who saw a loss of around 1 million jobs in the two years to the first quarter of 2010.
In Sweden, the unemployment rate rose to 9 percent in May, compared with 5.9 percent a year earlier.
Investors have hoped that China, the world's third largest economy, could lead the way out of recession. On Thursday World Bank raised its China forecast for growth this year to 7.2 percent, below Beijing's official target of 8 percent but up from the bank's 6.5 percent projection in March.
In Japan, a Reuters poll showed manufacturers have grown much less pessimistic about business over the last month, but consumer reluctance to spend has reinforced concerns that the recovery will be long and slow.
A belief that the worst is past in the deepest global recession in six decades has driven world stocks up around 40 percent from a March low. But investors are now looking for signs of recovery.
U.S. stocks were higher after the jobless data, while the FTSEurofirst 300 index was down. Japanese shares fell 1.4 percent.
