The United States is pushing hard in international negotiations for a "significant increase" in capital held by financial firms as a buffer against catastrophic failures that could threaten the global economy, a senior U.S. Treasury official said on Tuesday.
Michael Barr, the U.S. Treasury's assistant secretary for financial institutions, told a business group the new requirements would focus on common equity and would exclude liabilities that failed to absorb losses during the financial crisis.
"In the Basel III negotiations, we are pushing hard to set minimum capital ratios at a level that will represent a significant increase in firms' requirements," Barr told business professionals at the Chicago Club.
"These new requirements include the creation of a capital conservation buffer above the minimums, which if breached will restrict firms' ability to pay dividends or buy back stock. Such restrictions will help shore up a firm's capital base before it reaches a point of no return," he said.
Barr, one of several top Treasury officials to give speeches in recent days on implementation of the financial industry reforms enacted by Congress, also said the next step for financial reform policy was to revamp mortgage finance giants Fannie Mae and Freddie Mac, which were put under government control in 2008 to prevent their collapse.
The Treasury is planning to host financial industry executives next week at a forum to gather ideas and will make a full reform proposal by January, Barr said. Prior to their seizure, the two government-sponsored enterprises were stockholder-owned but enjoyed an implied government guarantee that reduced their borrowing costs.
"In the future, we are not going to have — we can't afford to have — a system in which there are implicit government guarantees," he said in response to audience questions.
"If we decide we want to subsidize the housing sector we are going to need to decide to do that explicitly, and people are going to have to pay for it. I think that would be a fundamental change," Barr added.
Barr said the requirements for more and better-quality capital are a crucial part of the legislation's provisions aimed at ending "too-big-to-fail" — the perception that the government will swoop in to rescue large financial firms if they get into trouble.
He said the new rules being developed by the Basel Committee on Banking Supervision will require banks for the first time to hold enough liquid assets to meet potential cash outflows over a 30-day period. He added that the committee is also working on requiring firms to maintain stable funding sources over a one-year period.
The 27-member Basel committee, which represents regulators from major global banking centers from the United Kingdom to Singapore to Brazil, recently agreed on a framework for reforms in the wake of the financial crisis. But the full scope of the changes will not be determined until later this year, when the regulators are aiming to agree on numerical targets for Tier 1 capital and a timeframe for implementing the changes.
Banks have argued fiercely that adopting the so-called "Basel III" accord by a previous 2012 deadline would crimp their ability to lend to aid recovery.
Some countries, including France, Germany and Japan, have fought or withheld support from some of the proposed rule changes, but Barr said that ultimately the new standards "will help ensure that firms have sufficient capital to weather the crisis."
He added that the Treasury would "move quickly" to start reshaping the derivatives market, working with the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
This will include setting quantitative targets and timelines for moving standardized over-the-counter derivatives contracts onto central clearing houses, he said, noting that efforts to put in place international standards for derivatives market oversight and transparency must be accelerated.
Barr said international agreements are crucial to the success of the reforms, which also provide for new methods of market surveillance and a mechanism under which regulators can seize control of large, failing firms.
"We will not accept an international race to the bottom on regulatory standards," he said.
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