While it is still uncertain whether the plans will make it into law, limiting the scope of Wall Street's big banks would reduce trading liquidity across equity markets worldwide as their speculative money is withdrawn and they are forced to rein in their riskier lending to other investors.
The plans, outlined by Obama yesterday, have been compared with the regulations introduced in America during the Great Depression. They will dramatically curb bank profits and shares in financial companies were marked significantly lower overnight.
President Obama will have a tough task getting his bank reforms through Congress in the face of both Republican and Democratic scepticism, division and disarray, legislators signalled.
The new proposals are almost certain to be tacked on to a financial regulation bill that has been before Congress for almost a year. It was finally passed by the House last month but without a single Republican vote and with more than a score of Democrats opposed, and approval by the Senate will be even tougher to secure.
The White House views this as a win-win situation. If it gets a bill through that is tough on Wall Street, it hopes it will play well with the electorate: if the Republicans block it, the Democrats can portray them as pro-Wall Street. The problem with that strategy is that the Senate response will not be clear-cut. There are conservative Democrats who will not support many of the measures, while others still think Obama is not being radical enough.
In a sign of rebellion among Democrats in the Senate, some are threatening to vote against the re-appointment of White-house backed Ben Bernanke, whose tenure as chairman of the Federal Reserve is up this month.
The Democratic senator Russ Feingold said yesterday he would vote against another four-year term. Other Democrats are also promising to vote against him.
Another problem is that the passage of the bill falls on the Democratic chairman of the Senate banking committee, Chris Dodd, but he announced this month that he does not intend standing in November's Congressional mid-term elections, a decision that reduces his authority.
The bill leaves some Democrats, such as Chuck Schumer, the New York senator, in a bind. Representing a city heavily dependent on the financial sector, he said: "You can't do nothing because we all know the banks made mistakes, but you can't be so draconian that you cause job loss or make the institutions not function properly."
Another problem for Obama's strategy is that the supreme court decision on Thursday allowing companies to financially back candidates means banks and other financial institutions can spend heavily in support of those opposed to the regulations. Given the way the health bill has become bogged down, the chances are the financial regulation bill will not have got through Congress before November.
The bill would require the support of two-thirds of the 100-member Senate to get through, and the election of the Republican Scott Brown denies the Democrats that majority.
