Geithner seeks unity on bank capital standards

By David Cho and Brady Dennis
Washington Post Staff Writer
Wednesday, June 9, 2010; A15

Treasury Secretary Timothy F. Geithner convened senior bank regulators Tuesday, warning them that their differences could undercut the U.S. government as it negotiates new international bank standards with other countries, according to sources who have been briefed on the gathering or were present.

Geithner urged them to speak with a unified voice, and senior Federal Reserve officials echoed that appeal, the sources said.

"One of our problems is, as you are entering negotiations [internationally], you can't be negotiating with yourself," a senior official said.

Regulators have been divided over how much money banks should hold in reserve to protect themselves against unexpected losses.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., has thrown her support behind a measure offered by Sen. Susan Collins (R-Maine) that could force banks to raise tens of billions of dollars to replace a less stable form of capital in their reserves. The Senate approved the proposal as part of the legislation overhauling financial regulation, though the measure could be changed when House and Senate lawmakers hash out differences in their bills beginning this week.

Treasury and the Fed oppose the proposal because encoding such requirements into U.S. law "eliminates a negotiating chip" that could be used to obtain concessions from European nations, a senior government official said, speaking on the condition of anonymity because the discussions were private.

Attending the meeting Tuesday, over muffins and coffee in the conference room across from Geithner's office, were senior officials from the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency as well as Treasury, the FDIC and the Fed's Washington headquarters.

In general, U.S. regulators agree that capital standards at banks were too weak during the financial crisis.

Geithner has said that raising capital standards is at the core of efforts to overhaul the financial system. The crisis pulled back the curtain on capital buffers that were too small or of low quality. Those shortcomings triggered a crisis of confidence in the nation's banks. Some firms collapsed during the panic, nearly taking the entire system with them.

U.S. officials have said countries must set a common capital standard. Otherwise banks could move to the country where requirements are the most lax. The regulatory overhaul legislation pending in Congress defers to the global negotiations, largely assigning the setting of capital standards to an international committee led by a figure largely unknown to most Americans: Nout Wellink, chairman of the Basel Committee on Banking Supervision.

Wellink's panel, which derives its name from its host city in Switzerland, faces intense lobbying by banks and a web of international politics. European nations, for instance, not only are seeking different standards than the United States but also disagree with each other. Even if the committee crafts new capital rules, each country has the choice to adopt or reject them.

Fed officials, as the lead U.S. negotiators, want to ensure that the standards will be tough enough. But some U.S. officials say those efforts are complicated by Collins's measure, which would prevent "trust-preferred" securities from counting toward a bank's capital requirements.

The securities have characteristics of both debt and equity, and firms often create them to meet regulatory capital requirements without having to raise capital through other means, such as selling common stock. FDIC officials have argued that such securities do not amount to meaningful capital support for banks and don't adequately absorb losses.

Throughout the financial crisis and its aftermath, Bair has been an independent voice, at times at odds with Geithner and fellow regulators. For example, she pushed for her own plan to stem mortgage foreclosures and questioned the government's bailout of Citigroup. She also has been outspoken as Congress has debated the financial regulation bill, pushing for an upfront fund paid for by the financial industry that could be used to liquidate large, failing firms, in addition to the Collins amendment.

Bair, who could not be reached for comment Tuesday, has called the Collins amendment "a critical element to ensure that U.S. financial institutions hold sufficient capital to absorb losses during future periods of financial stress."

But banking industry representatives have called it an onerous measure that would force banks to raise massive new sums of capital in a tough market.

Lawmakers on the House-Senate conference committee are facing pressure from industry and some government officials to drop the Collins amendment, or at least soften it, perhaps grandfathering in the trust-preferred securities or phasing new rules in over time.

But Democratic leaders, mindful of the 60 votes needed for final passage in the Senate, are acutely aware that Collins is one of only four Republicans who voted for the far-reaching legislation last month.

Comptroller of the Currency John C. Dugan did not attend Tuesday's meeting because he was returning from a conference in Europe, an OCC spokesman said. In a speech earlier this year before the Institute of International Bankers, he warned that if regulators require banks to set aside too much capital, they risk harming the economy by restricting much-needed access to credit.

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