Would world economy miss the financial 'froth'?

The political backlash against profligate global banks is underway; regulators everywhere are sizing up "hot" cross-border money flows; and capital controls in developing economies are back in vogue. Financial globalisation, in short, is on the back foot.

The questions for policymakers and for investors is whether it is possible to skim the froth off global finance without undermining the benefits of "real" globalisation in trade and direct investment.

And for many emerging economies, is slightly lower but more stable growth a price worth paying for damping volatile and destabilising financial flows?

To judge by the International Monetary Fund's world growth projections this week, the risks to underlying growth so far appear to be modest.

The IMF boosted this year's global growth projection by almost a full percentage point to 3.9 per cent and upped next year's to 4.3 per cent - far in excess of the average 3.3 per cent rate of the past decade and the fastest clip since the 5.2 per cent peak of the boom in 2007.

That's clearly not the full picture. Apart from moves by emerging giants such as Brazil to tax capital inflows flooding their local markets, most of the post-crisis proposals to rein in global banks and finance are still in gestation.

But US President Barack Obama's bombshell in proposing to ban US banks from proprietary trading unrelated to customer business was the clearest sign yet that months of post-mortems and suggestions are finally gaining traction among policymakers and other proposals should be taken seriously.

The downsizing of global mega banks, previously seen too big to fail or bail, has many fans abroad and could have far-reaching implications for cross-border capital over time.

The thinking also tallies with calls for more "host country" rather than "home country" regulation, as outlined by economists writing for the UK's Warwick Commission last November.

This would see global banks being forced to replace foreign branches with fully-capitalised subsidiaries, regulated by the host country rather than the regulator in the parent's country - moves flagged by Bank of England governor Mervyn King as making life "a whole lot easier for the national regulators."