WASHINGTON — The Treasury Department on Thursday revealed a proposal that aims to strengthen capital and liquidity standards at banking companies, emphasizing "higher quality" forms of capital as better cushions against potential losses.
"A principal lesson of the recent crisis is that stronger, higher capital requirements for banking firms are absolutely essential," Treasury said in a policy statement expected to be presented to Group of 20 leaders in London in the coming days.
The proposal would require systemically significant banking firms to hold higher capital buffers than their non-systemically significant counterparts. Such firms should be forced "to internalize the costs of such potential spillover effects," the policy statement said.
Further, the statement recommends strengthening the rules banks must use to assess portfolio risks and subject institutions to "simple" non-risk-based leverage constraints.
"Major financial institutions around the world had reserves and capital buffers that were too low, used excessive amounts of leverage to finance their operations and relied too much on unstable, short-term funding sources," Treasury said in its announcement. "The resulting distress, failures and government bailouts of these firms imposed unacceptable costs on individuals and businesses around the world."
The Treasury proposal recognizes that stricter rules for banks could curtail the availability of credit in the marketplace.
Still, Treasury is recommending global finance leaders reach agreements on new international capital and liquidity standards for the banking sector by the end of 2010, aiming for implementation within the following two years.