France, Germany and Britain offered support for Obama's plan on Friday, but they stopped short of pledging to do the same in their own countries.

'Good step forward'

Christine Lagarde, France's economy minister, welcomed the proposal, calling it a "very, very good step forward", the Reuters news agency reported.

"For the last 10 months, what on earth have the world's G20 countries been doing? We've had so much rhetoric ... frankly all the countries in the world have done zippo"

David Buik,
market analyst

"They see that regulation, which was a taboo word that was difficult to use in financial circles in the United States, is vital to contain ... banking excesses," she said.

Britain's opposition Conservatives also offered support, saying Obama had created space for the rest of the world to come up with "a sensible system of international rules".

"I have said consistently that we should look at separating retail banking from activities like large-scale propriety trading and that this was best done internationally," George Osborne, the Conservative finance spokesman, told BBC Radio.

Meanwhile, Germany's finance ministry said the proposals were a "helpful suggestion" and said Berlin would present its own proposals on improving banking regulation.

'Ill-timed' proposal

But financial institutions were less impressed.

David Buik, a market analyst at BGC Partners in London, said investors saw the potential legislation is "ill-timed and wrong".

The proposal would stop banks from investing in private equity funds [GALLO/GETTY]
"Here we have, for political expediency, this ill-thought out strategy and it is going to send waves of considerable fear, which we've seen all over the world particularly in bank shares," he told Al Jazeera.

"If you're going to make banks smaller, you're doing it at a time when the world's economy is incredibly brittle and so is the recovery."

Buik said the proposal is being rushed in to make up for the failures of world governments to come up with stricter regulations.

"For the last 10 months, what on earth have the world's G20 countries been doing? We've had so much rhetoric about what they're going to do about regulation, and frankly all the countries in the world have done zippo [nothing] and this is a disgrace.

"By this time now, we should've had much tougher capital requirements, much greater transparency [and] a much better credit reserve in place."

Obama's proposals, which need congressional approval, will prevent banks or financial institutions owned by banks from investing in, owning or sponsoring a hedge fund or private equity fund.

They would also set a new limit on the size of banks in relation to the overall financial sector that would take into account deposits – which are already capped – as well as liabilities and other non-deposit funding sources.