Treasury Secretary Tim Geithner on Wednesday said the U.S. would implement proposed international capital rules aimed at helping financial institutions withstand future crises by 2012.
Testifying before the House Financial Services Committee, Geithner praised the new rules, saying they would help constrain “excessive risk-taking and strengthen banks abilities to absorb losses as seen in the latest financial crisis.”
“The new standards are designed to ensure that major banks hold enough capital to withstand losses as large as what we saw in the depths of this recession and still have the ability to operate without turning to the taxpayer for extraordinary help,” Geithner said.
His testimony sought to downplay fears the new rules could hurt the economy. Geithner noted that the Basel Committee on Banking Supervision provided banks with a “meaningful transition period.” For example, a new 7% minimum common equity ratio does not go fully in effect until 2019.
“For the most part, banks should be able to meet these new requirements through future earnings, which will help protect the recovery currently underway,” said Geithner.
Under the agreement, new capital standards will take effect in the beginning of 2013. Banks have until 2015 to raise their common equity capital ratio to at least 4.5%. A buffer that is intended to help banks shore up funds during boom times will be phased in between 2016 and 2018.
Geithner said that the definition of capital, which will become “progressively more stringent,” won’t take full effect until 2018.
Still, Geithner acknowledged uncertainty in the future, but stressed that tougher capital rules would help to ease the severity of possible financial crises.
“We cannot know with certainty how the economy and the financial system will evolve, but these heightened capital requirements, along with other important reforms, should substantially reduce the likelihood that we will soon repeat the sort of severe financial crisis that we have just lived through,” he said.
There are still several pieces that Basel negotiators are looking to iron out, including liquidity requirements, as well as certain additional requirements that will be tacked on for the most systemically important institutions. The leaders of the Group of 20 nations are expected to sign-off on the agreement in November when they meet in Seoul.
“We will need to make sure that they are calibrated correctly before they are fully implemented,” he said of the liquidity requirements.
Geithner also warned of the importance of individual countries implementing the new capital standards to ensure a “level playing field” throughout the global financial system.
“We will engage our foreign counterparts to look for ways to ensure that these agreements are implemented in a transparent and consistent way by supervisors in different countries,” he said.
Source: Structured Finance News