US Treasury delays first step in new capital rules

By Reuters Staff
January 20, 2010

By Karey Wutkowski

WASHINGTON, Jan 20 (Reuters) – The U.S. Treasury Department has missed the first deadline in its work to draft tougher capital standards, raising questions about the timeline of international efforts to ensure stronger bank balance sheets.

Treasury had given itself until the end of 2009 for an internal working group to produce a report assessing existing capital requirements.

The report is expected to inform the department as it tries to reach a domestic and then international agreement on stricter capital and leverage standards.

Policymakers are rewriting the rules after confidence crises and liquidity crunches led to the collapse of Bear Stearns, Lehman Brothers and other major financial institutions. Many firms had strong capital ratings shortly before they failed or were rescued by the government.

Treasury’s first missed deadline could push back other targets, but there is not an extreme urgency to get new rules in place, said Kevin Petrasic, a financial services attorney with Paul Hastings in Washington and a former bank regulator.

“Certainly banking regulators are already doing a lot of work to bolster capital on an institution-by-institution basis,” Petrasic said.

GLOBAL DEAL

In September Treasury issued principles for reforming regulatory capital rules and set out a timeline. It is hoping for “a comprehensive international agreement on the new global framework” by the end of 2010. Implementation of the reforms would be effective at the end of 2012.

Treasury is working with other G20 countries and with the Basel Committee on Banking Supervision, the global bank standard-setter.

Treasury Secretary Timothy Geithner has made it clear he is not in a rush to throw out new numbers for capital standards.

He has said that while markets remain fragile and risk averse, policymakers are more likely to overshoot and seek standards that are too strict.

“Treasury continues to work with the other regulatory agencies and our international colleagues on the key issues in reforming capital standards,” Treasury spokesman Andrew Williams said about the missed deadline. “That work is ongoing, based on the policy statement that Treasury released in September.”

Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution think tank, said capital standards are a high priority but not necessarily at the top of Treasury’s to-do list.

“Given everything they’ve been up to, it’s easy to imagine them not meeting the deadline,” Elliott said.

WIDER OVERHAUL

Increased capital standards is just one component of a broad financial regulatory overhaul Treasury has proposed and continues to try to sell to lawmakers.

Treasury is urging Congress to give the government the ability to dismantle large, troubled financial firms, create an independent Consumer Financial Protection Agency, and to structure a new systemic risk regulator, among other reforms.

Elliott also said that bank regulators are already making firms hold higher capital levels than the new rules will likely call for.

He predicts other missed deadlines, but said concrete numbers about future capital standards should start floating around within a few months.

That will provide some clarity for the financial firms clamoring to position themselves in the face of a changing rule book, Elliott said.

“It’s basically a race — do banks hate uncertainty more or excessively conservative capital requirements?” Elliott said.

(Reporting by Karey Wutkowski; Editing by Andrew Hay) ((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8374))

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