After sunset impression of the alpine Davos: The biggest tourism resort of the Swiss alps, captured before the opening of the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 23, 2010. ©  The World Economic Forum swiss-image.ch/Photo by Christof Sonderegger

Davos 2010: European Central Bank President Jean-Claude Trichet, who will arrive in Davos, Switzerland today for the world Economic Forum, in an interview with The Wall Street Journal, offered qualified support for President Obama's plan to limit the size and activities of large banks, while stressing such proposals should be coordinated globally. Separately on Tuesday, Bank of England Governor Mervyn King said bankers should take a permanent pay cut to align them with other professionals as he outlined plans to carve up lenders across national boundaries.

The 67 year old Trichet, who will retire in November 2011, after completing his one-year term of eight years, said the Obama proposed reforms "go in the same direction of our own position, namely ensuring that the banking sector focuses on financing the real economy." He added that the ECB was "examining [the Obama proposals] with great care."

Germany and France have focused on forcing banks to increase their capital cushion instead of restricting their business activities.

Last Friday, Germany's BdB banking association said President Barack Obama's proposals could hamper the performance of banks and the economy.

Those plans "won't improve the stability of the financial system," said the association, which represents German commercial banks such as Deutsche Bank, Commerzbank and Deutsche Postbank.

"Those plans threaten predominantly the capability of the US as a financial center and eventually (would) hurt the entire global financial system. This would have negative consequences, notably for economic growth," said BdB's managing director, Manfred Weber.

Instead of concentrating on the size of banks, "worldwide rules and regulation should focus on better recognizing market developments and interconnections, and taking action if needed," Weber said.

In the past, so-called Basel capital adequacy rules, have been easy to fiddle.

Mervyn King said the US proposals make it clear that radical reforms are now on the table.

King told the Treasury Select Committee of the House of Commons that it isn't realistic to pretend a financial structure could be designed that would prevent future crises from occurring, and the more sensible approach is to make any new system resilient enough so that troubles in one section can't bring down the rest.

He said the banking sector could be sustainable only if “returns and remuneration for both equity holders and employees are comparable with other professions and other types of investments”.

©  The World Economic Forum swiss-image.ch/Photo by Monika Flueckiger

The governor told the committee that he believed big lenders should be forced to carve themselves up into subsidiaries along national lines to try to build financial firewalls across the banking system and stop massive losses spreading. Foreign banking subsidiaries that run into trouble could be separated and contained  -- and become the problem of the overseas country in which they are based.

"The system that has the least to be said for it is the present system, the status quo. That's the one that's brought us financial crises of ever-growing severity," King said.

He said that the central bank was still considering whether to implement so-called US Depression era Glass Steagall measures that force banks to separate commercial banking from riskier investment and trading activities.

“Banks who think they can do everything for everyone all over the world are a recipe for concentrating risk,” he said.

Jean-Claude Trichet told The Wall Street Journal that the financial system is returning to normal functioning not  due to bankers but the activities of governments and central banks:"I trust profoundly that our democracies will not accept twice to put between 25% and 30 % of GDP of taxpayer risk on the table to sustain the financial sector. We have an absolute obligation to make the system much more solid.

This is sometimes challenged by some financial institutions and market participants that see that the market is fortunately functioning again and have forgotten that governments put over 25% of GDP of taxpayer risks on the table and that major central banks have engaged in non-conventional measures, which have been absolutely extraordinary. Those miss the point that if things are progressively back to a normal functioning this is not thanks to the spontaneous behavior of the system itself, but very largely of the incredible engagement and commitment of public authorities which normally should not do that."

The ECB president said one of the major lessons we have to draw from the crisis was that risk management by financial institutions had been unacceptably poor and a major improvement of risk management by private institutions is of the essence.

Trichet interview transcript issued by the ECB