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US wants stricter rules on banks’ reserves

Geithner to pitch global pact to G-20

Under Timothy Geithner’s proposal, a comprehensive international deal should be reached by the end of 2010. Under Timothy Geithner’s proposal, a comprehensive international deal should be reached by the end of 2010. (AP/File 2008)
By Martin Crutsinger
Associated Press / September 4, 2009

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WASHINGTON - The Obama administration proposed stronger international standards yesterday for the capital reserves that banks are required to hold. The goal is to avoid a repeat of last year’s severe financial crisis.

The administration released a 14-page outline that would require higher capital cushions for firms deemed to be so large and interconnected that their failure would threaten overall stability of the financial system.

Treasury Secretary Timothy Geithner is slated to discuss the proposals during two days of meetings that begin today in London among the Group of 20 nations.

Under Geithner’s proposal, a comprehensive international deal should be reached by the end of 2010 with countries agreeing to implement the measure by the end of 2012. The administration is hoping to get broad agreement among major countries on raising capital standards so that financial institutions in the United States wouldn’t be put at a disadvantage if capital standards in the nation are raised to higher levels than their competitors face.

Many experts believe the crisis occurred at least in part because current bank regulations don’t impose strict enough requirements for the reserves a bank must hold to cover potential loan losses.

“The global regulatory framework failed to prevent the buildup of risk in the financial system in the years leading up to the recent crisis,’’ the Treasury Department said in a statement yesterday. “Going forward, global banking firms must be made subject to stronger regulatory capital and liquidity standards that are as uniform as possible across countries.’’

Treasury said the new principles “should guide reform of the international regulatory capital and liquidity framework to better protect the safety and soundness of individual banking firms and the stability of the global financial system and economy.’’

Under the proposed policy, capital requirements for all banks and financial firms would be increased while those for firms deemed to be systemically risky would have even higher required capital levels.

Banks and financial firms would be subject to conservative, detailed standards for the amount of cash they are required to hold.

The rules for measuring risks in banks’ portfolios would be improved.