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The US Treasury set out its core principles to reform the international regulatory capital and liquidity framework. Global banking firms must be made subject to stronger regulatory capital and liquidity standards that are as uniform as possible across countries, the report says. It calls for a comprehensive agreement on new international capital and liquidity standards by end 2010, with an implementation deadline by 2012.
Banking firms should be subject to a simple, non-risk-based leverage constraint and a conservative, explicit liquidity standard, the paper says.
It also calls for higher capital requirements and better rules to match the risks embedded in banks’ portfolios. The pro-cyclicality effects of the regulatory capital and the accounting regimes should be reduced.
Main points of the proposed stronger capital and liquidity standards for banking firms:
Ø Capital requirements should be designed to protect the stability of the financial system, not just the solvency of individual banking firms, including banks, bank holding companies, financial holding companies and large, interconnected firms.
Ø Capital requirements for all banking firms should be increased and capital requirements for financial firms that could pose a threat to overall financial stability should be higher than those for other banking firms.
Ø The regulatory capital framework should put greater emphasis on higher quality forms of capital that enable banking firms to absorb losses and continue operating as going concerns.
Ø The rules used to measure risks embedded in banks' portfolios and the capital required to protect against them must be improved. Risk-based capital requirements should be a function of the relative risk, including systemic risk, of a banking firm's exposures, and risk-based capital rules should better reflect a banking firm's current financial condition.
Ø The pro-cyclicality of the regulatory capital and accounting regimes should be reduced and consideration should be given to introducing countercyclical elements into the regulatory capital regime.
Ø Banking firms should be subject to a simple, non-risk-based leverage constraint.
Ø Banking firms should be subject to a conservative, explicit liquidity standard.
Ø Stricter capital and liquidity requirements for the banking system should not be allowed to result in the re-emergence of an under-regulated non-bank financial sector that poses a threat to financial stability.
Ø A comprehensive agreement on new international capital and liquidity standards should be reached by
Principles for Stronger Capital and Liquidity Standards for Banking Firms