Treasury Secretary Geithner told lawmakers Wednesday that he would be vigilant in ensuring that other countries would not evade new global banking rules that would force institutions to hold more capital, adding that the United States would not be placed at a competitive disadvantage.
Testifying to the House Financial Services Committee, Geithner said he was worried that some countries could attempt to game the system while implementing rules agreed to by the Basel Committee on Banking Supervision this month, but added the pact had sufficient safeguards to cut down on disparities.
"I want to emphasize it is very important to us that these new standards are implemented by national authorities around the world in a way [that] generates a level playing field," Geithner said of the accords, which will complement capital standards mandated under the Dodd-Frank financial regulatory overhaul.
Banks under the agreement will have to retain common equity of at least 7 percent of assets, tripling the amount under current rules. Common equity is the amount of a shareholders' investment in the bank. That rule includes a 2.5 percent buffer that they could draw down during a crisis. The provision has to be ratified by each country before it goes into effect in 2013.
Geithner said the agreement also includes other protections, such as a stronger definition of what banks could count as capital, and tougher assessments that weigh a bank's capital to reflect the risk of its assets, both of which should help in curbing the leveraging that occurred during the 2008 banking crisis.
Rep. Randy Neugebauer, R-Texas, asked Geithner what if other countries decided to have lax enforcement. "How do we protect the market?" he asked.
"We are very worried about that," Geithner said. "What this agreement does is substantially narrow the capacity for countries to have their system run with lower standards." Treasury would monitor "very carefully and pursue much more aggressively" any signs of countries attempting to weaken the standards, Geithner said. He added that stress tests that both U.S. and European regulators conducted on top banks should be standardized to help prevent any evasion from the new rules.
Financial Services Chairman Barney Frank said he was concerned over how foreign countries may regulate nonbanks that do not have to adhere to Basel standards. The problem could be exacerbated because under Dodd-Frank, a new regulatory council will monitor large banks and nonbanks whose failure could put markets into turmoil, holding both to high standards.
"Simply having us doing it doesn't work," Frank said.
But the new law does give Treasury and the Federal Reserve the authorization to take actions against countries that house firms that are trying to bypass its rules.
In another matter, Geithner said Treasury was still considering whether to implement "contingent capital" standards, which is debt that converts to equity in a crisis, allowing a firm to strengthen its capital holdings in a frozen credit market. Large banks have opposed it, arguing it is too expensive and no certain fix.
Geithner said the administration has not found an adequate formula to ensure it would work, to ensure it would not be punitive, or found the right trigger so that it would not be applied arbitrarily.
"There is still tremendous appeal for us in designing a form of contingent capital that would make the overall banking system less prone to periods of mania, euphoria and less prone to panic," Geithner said.