Bloomberg News

Geithner Urges Rules on Swaps to Avoid ‘Race to the Bottom’

June 06, 2011

(Updates with Geithner comments from fifth paragraph.)

June 6 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner said he wants global minimum standards on derivatives trading and urged regulators to avoid a “race to the bottom” in which financial risk moves to the least-supervised economies.

“We need global minimum standards for margins on uncleared derivatives trades,” Geithner said today in a speech in Atlanta. “Without international consensus, the broader cause of central clearing will be undermined. Risk in derivatives will become concentrated in those jurisdictions with the least oversight. This is a recipe for another crisis.”

The U.S. Commodity Futures Trading Commission and Securities and Exchange Commission are writing new regulations required by the Dodd-Frank Act, the financial overhaul enacted last July, after largely unregulated derivatives helped fuel the 2008 credit crisis. Dodd-Frank seeks to reduce risk and boost transparency in the $601 trillion global swaps market by having most swaps guaranteed by central clearinghouses and traded on exchanges or other venues.

“We don’t want to see another race to the bottom around the world,” Geithner said in his remarks at the International Monetary Conference. “As we act to contain risk in the U.S., we want to minimize the chances that it simply moves to other markets around the world.”

Capital Size

Geithner said the size of the capital requirement for the largest systemic institutions should be balanced.

“The central banks and supervisors need a balance between setting capital requirements high enough to provide strong cushions agains0t loss but not so high to drive the re-emergence of a risky shadow banking system,” he said. “They also need to look at the full impact of other reforms in the system that have the effect of reducing both the probability of failure of large institutions and the ability of the rest of the financial system to absorb or contain or diffuse those losses.”

The Dodd-Frank Act mandates the establishment of heightened capital standards for banks with assets over $50 billion and systemic institutions. In addition, global regulators are hammering out accords in Basel, Switzerland, that would more than double the minimum common equity requirement for banks.

“Capital requirements cannot bear the full burden of protecting the system against risk, and they should be considered in the context of the reinforcement provided by these other reforms,” Geithner said.

Largest Firms

In the U.S., Geithner said regulators will require the largest U.S. firms to hold an additional surcharge of common equity. He added that regulators “do not need to impose on top of that requirement any of the three other proposed forms of additional capital -- convertible, bail-in, contingent capital instruments or counter-cyclical capital requirements.”

The United Kingdom’s “experiment in a strategy of ‘light touch’ regulation to attract business to London away from New York and Frankfurt ended tragically,” he said. “That should be a cautionary note for other countries deciding whether to try to take advantage of the rise in standards in the United States.”

Geithner said the U.S. “will do what we need to do to make the United States financial system stronger. We will do so carefully. And as we do it, we will bring the world with us.”

The U.S. Chamber of Commerce, the National Association of Corporate Treasurers and the Business Roundtable are among lobbying groups pressing regulators to ensure that corporate end-users of derivatives don’t need to set aside margin in their swap transactions to reduce risk. The companies say such a requirement would force them to set aside millions of dollars that could be invested elsewhere.

Appointments Blocked

Geithner criticized some U.S. lawmakers for using the confirmation process to block appointments. Nobel laureate Peter Diamond, nominated three times by President Barack Obama to serve on the Federal Reserve’s board of governors, withdrew his nomination today following opposition from Senator Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee.

“Those in the U.S. financial community who are supporting these efforts to block resources and appointments are looking for leverage over the rules still being written. There is a long tradition of similar efforts,” Geithner said. “They will not be successful in undermining the core elements of reform, but they will risk causing a different type of damage.”

Geithner also was scheduled to meet with representatives from Aflac Inc., Delta Air Lines Inc., Coca-Cola Co., SunTrust Banks Inc. and United Parcel Service Inc.

--Editors: Kevin Costelloe, Jim Rubin.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Cheyenne Hopkins in Washington at Chopkins19@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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