According to US Treasury Secretary Geithner, the newly passed Basel 3 and Dodd-Frank Act will create strong regulatory processes that should substantially reduce the likelihood of “too big to fail” banks requiring a taxpayer bailout. Under the new Basel 3 regulatory framework, banks would be required to hold sufficient capital to weather substantial losses. See the following article from HousingWire for more on this.
The regulatory framework included in Basel 3 and the Dodd-Frank Act “will significantly lower the probability and severity of future financial crises” while protecting taxpayers by limiting excessive risk-taking by financial institutions, according to Treasury Secretary Timothy Geithner.
Testifying before the House Financial Services Committee, Geithner said the new capital requirements for banks included in Basel 3 are meant to curtail the need for taxpayer bailouts of so-called “too-big-to-fail banks.”
“The new standards are designed to ensure that major banks hold enough capital to withstand losses as large as what we saw in the depths of this recession and still have the ability to operate without turning to the taxpayer for extraordinary help,” he said.
Geithner expects the mandates to result in a “more stable and more resilient” financial system because they constrain risk taking while making banks stronger and more capable of absorbing losses.
“Capital requirements are the financial equivalent of having speed limits on our highways, anti-lock brakes and airbags in our cars, and strong building codes in communities prone to earthquakes,” Geithner said.
He said the capital requirements that were in place prior to the crisis were too low and too many banks “in many parts of the world were allowed to operate with low levels of capital relative to the risks they took on.”
Some have blasted the time frame in which the Basel 3 requirements will take effect. But Geithner said the timeline for implementation is appropriate because raising capital requirements too fast would hurt the economic recovery.
“To limit that possibility, the agreement gives banks a meaningful transition period to meet the new standards,” he said.
The requirements don’t start taking effect until the beginning of 2013, and banks don’t have to fully comply with the minimum common-equity requirement of 4.5% of assets until the beginning of 2015. The whole process won’t be completely in place until 2019.
Geithner said U.S. banks are well positioned to adapt to new global rules because the stress tests performed in early 2009 forced banks to raise more common equity.
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