Treasury Proposes Tougher Global Bank Requirements
The U.S. Treasury Department proposed tough global standards on capital and liquidity at financial institutions, citing the need to reduce the chance of another international financial meltdown. The new rules came a day before the G-20 meets in London.The standards propose that higher capital levels at all banks be required. The standards also outline a simple constraint on leverage for all banks along with strict but flexible liquidity regulations.
G-20 finance ministers were expected to discuss the Treasury proposal over the weekend. The ministers of rich and developing countries are at the beginning of a process to replace Basel II standards with something much broader and far reaching.
The U.S. Treasury says a comprehensive new international agreement should be reached by the end of 2010 and that countries should implement the standards by the end of 2012.
The Treasury's 14-page proposal states capital and liquidity rules need to be as uniform as possible across countries, and should be structured so as not to allow the re-emergence of an under-regulated financial sector outside of the banking system.
The proposal shows the gaps in current regulations that allowed major financial firms to operate with low capital buffers, excessive amounts of leverage and unstable, short-term funding sources.
The framework comes nearly a year after U.S. investment bank Lehman Brothers filed for bankruptcy, an action that sent the global financial system reeling and froze credit markets. Many of the institutions that have failed or have been subjected to government bailouts over the past year have met regulatory standards for being well-capitalized, but have suffered severe liquidity problems.
U.S. federal regulators are reworking capital requirements for US financial institutions. The Treasury's deadline is Dec. 31, 2009 for a working group to produce a report that reassesses existing regulatory capital rules for banks.
