U.S. calls for global bank capital requirements

The U.S. Treasury Department Thursday proposed tough international standards on capital and liquidity at banks, saying new rules are needed to reduce the risk of another global financial crisis.

The standards call for higher capital levels at all banks and even more stringent requirements for banks that could pose a threat to overall financial stability. They also call for a simple constraint on leverage for all banks, as well as strict but flexible liquidity regulations.

The proposal will be a key topic of discussion at the meeting of the Group of 20 rich and developing economies in London, which begins on Friday, starting a process eventually to supplant the Basel II standards with a broader-based effort.

The U.S. Treasury said a comprehensive new international agreement should be reached by the end of 2010 and that countries should implement the standards by the end of 2012.

"Capital requirements have long been and will remain a principal regulatory tool used by supervisors to promote the safety and stability of the banking system," the proposal says.

U.S. Treasury Secretary Timothy Geithner said Wednesday that a stronger capital accord was a critical part of making the world financial system more stable by limiting the risk of large institutions failing.

"We're going to be outlining a framework of principles to begin a discussion -- not to reach agreement on -- but to discuss a framework of principles on a new international capital accord that will put in place, once the crisis is behind us, a more conservative framework of constraints on leverage in the financial sector across the major globally active financial institutions," he told a news conference.
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Geithner said the accord would be developed under the auspices of the Financial Stability Board, an international body that was recently expanded to include major emerging economies such as China, India and Brazil.

The Treasury said in its 14-page proposal that capital and liquidity rules need to be as uniform as possible across countries, and that they should be structured so as not to allow the re-emergence of an under-regulated financial sector outside of the banking system.

But it did not prescribe specific capital or leverage ratios.

The proposal highlighted the gaps in existing regulations that let major financial firms around the world do business with low capital buffers, excessive amounts of leverage and unstable, short-term funding sources.

The framework comes almost a year after U.S. investment bank Lehman Brothers filed for bankruptcy, sending shockwaves through the global financial system and freezing credit markets.

Many of the institutions that have failed or have been subjected to government bailouts over the past year have met regulatory standards for being well-capitalized, but have suffered severe liquidity problems.

The Treasury's framework said new global rules should put greater emphasis on higher quality forms of capital, not just on levels of capital.

It also said the rules used to measure risks embedded in banks' books must be improved so that risk-based capital requirements are more accurate.

In the United States, officials are already working to rejig capital requirements. The Treasury has set a deadline of Dec. 31, 2009 for a working group to produce a report that reassesses existing regulatory capital rules for banks.

The Treasury said it was aware of the balance global regulators need to strike with the new rules.

"Stricter capital requirements generally will reduce the amount of financial intermediation and may limit credit availability," the proposal said.