Many of the world’s biggest banks are proposing reforms that would limit the size and scope of their businesses in responses to the credit crisis. The proposals would hold down the number of investors who can buy complex financial products, bring large swathes of the derivatives markets into regulators’ sights and call on banks to spend more on technology and risk management.

As a consequence many of the securitization businesses that helped fuel the boom on Wall Street and the City of London in the middle years of this decade could face tougher oversight and find far fewer opportunities for growth. Though these reforms would be costly, these costs will be minuscule compared to the hundreds of billions of dollars of write-down experienced by financial institutions in recent months.

Backed by banks including JPMorgan Chase, Merrill Lynch, Citigroup, HSBC, Lehman Brothers and Morgan Stanley, the proposals are being delivered to global regulators in the hope of producing rules for credit markets that would cut risk of contagion and restore confidence. The banks put their weight behind accounting changes to be introduced by 2010 requiring them to hold many complex products on balance sheets. Under the plans, all but the wealthiest retail investors would be barred from buying structured products, such as auction rate securities, a USD 330bn market used by municipalities and student loan providers to raise funds. The new rules would help ensure sophisticated financial products were only sold to investors with the resources and skills to understand and monitor them.