US Treasury Secretary Timothy Geithner said on Wednesday US banks should be able to meet new higher capital rules through future profits without crimping lending in a way that would harm the recovering economy. Earlier this month, regulators from 27 countries agreed to make banks hold more and higher quality capital so they can better withstand economic downturns and financial shocks. Under the proposal, the new rules would be phased in gradually and would not go into full effect until 2019.
-- US committed to meeting Basel deadlines
"It is important to note that because we moved so quickly with the bank stress tests in early 2009 that forced banks to raise more common equity, the US financial system is in a very strong position internationally to adapt to the new global rules," Geithner said in remarks prepared for delivery to a congressional committee.
"For the most part, banks should be able to meet these new requirements through future earnings, which will help protect the recovery currently under way," he said in his testimony to the House of Representatives Financial Services Committee. Geithner argued that the new capital standards will help create a more stable financial system and will help avoid a repeat of the 2007-2009 financial crisis.
Leaders from the Group of 20 developed and emerging nations are set to endorse the agreement, known as Basel III, when they meet in Seoul in November. It will then be left to each country to implement the deal. "It is ... essential that the Basel agreements are implemented by national authorities in a way that generates a 'level playing field' in our increasingly integrated global financial system," Geithner said. "We will engage our foreign counterparts to look for ways to ensure that that these agreements are implemented in a transparent and consistent way by supervisors in different countries."
The rules will force banks to hold top-quality capital totalling 7 percent of their risk-bearing assets, more than triple what they do now. Banks will have until 2015 to meet the minimum core Tier 1 capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets. An additional 2.5 percent "capital conservation buffer" will have to be in place by 2019.
Basel negotiators also agreed to require banks to build a separate "countercyclical buffer" of between zero and 2.5 percent when the credit markets are going strong. The idea behind the buffer is that it can prevent the overheating of the economy during boom times while allowing banks to build up capital so they are in a better position to lend when a slowing economy needs a boost.
This part of the agreement is supposed to be implemented "according to national circumstances." "We will also continue to explore innovative ways, such as the use of countercyclical buffers and contingent capital, to expand the capacity for the system to absorb unexpected losses without amplifying shocks to the system," Geithner said. "By forcing financial institutions to hold more capital, we will both constrain excessive risk-taking and strengthen banks' abilities to absorb losses," he said.
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