U.S. 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, TreasurySecretary Timothy Geithner told a congressional panel Wednesday.
Photo by: Pete Souza
Timothy Geithner
In a separate appearance, Geithner also said the economy is healing but still needs support from both political parties to help small businesses and extend middle-class tax cuts.
"It is important to note that because we moved so quickly with the bank stress testsin early 2009 that forced banks to raise more common equity, the U.S. 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.
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.
"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.
Leaders from the Group of 20developed 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.
"By forcing financial institutions to hold more capital, we will both constrain excessive risk-taking and strengthen banks' abilities to absorb losses."
"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 new Basel III ruleswill force banks to hold top-quality capital totaling 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.
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.
"By forcing financial institutions to hold more capital, we will both constrain excessive risk-taking and strengthen banks' abilities to absorb losses," he said.
At a Treasury town-hall meeting with employees, Geithner said more action is neededto help the economic recovery.
"Right now, we need bipartisan action to help reinforce this recovery," he said, adding a call to extend tax cuts for Americans making less than $200,000 past a scheduled expiry at year-end.
Republicans on Capitol Hill want to also extend tax cuts for wealthier Americans but the Obama administration is resisting doing so, saying that would cost $700 billion in new borrowing over 10 years to help only 2 percent of Americans who make $250,000 or more a year.