WASHINGTON (MNI) – The following is the text of Treasury Under
Secretary for International Affairs Lael Brainard’s remarks prepared
Monday for the Institute of International Bankers:
Good morning. I would like to thank IIB for hosting this event.
It’s a pleasure to be here.
We have just concluded a series of meetings with finance officials
from around the world at the Annual Meetings of the World Bank and the
IMF. The dominant focus was the need for greater cooperation and
coordination to steer the global economy onto a path of stronger and
more balanced growth. Officials from around the world emphasized the
critical responsibility of each major economy to support the global
adjustment process. When some countries engage in policies of
competitive non appreciation that impede global adjustment, it
exacerbates adjustment challenges for other countries-whether through
intensified capital inflows or diminished trade opportunities-and lowers
growth overall.
To ensure more sustainable and balanced growth will require not
only national policy actions in each of our countries, but also stronger
international agreement on the rules of the game and a framework to
ensure coordination.
Stronger rules of the game and greater international
coordination-these are also the key requirements of a sounder and more
resilient financial system. As everyone gathered in this room acutely
understands, the financial crisis took an immense toll on our
businesses, families and workers. We are still healing from the crisis,
and we are still working to strengthen the global recovery and repair
the financial system.
As you know, the United States is aggressively pursuing financial
reform at home. The historic Dodd-Frank legislation, which my colleague
Bill Dudley will address, is the most far reaching reform of our
financial system in decades.
But one of the fundamental lessons of the crisis is that national
efforts, by themselves, while necessary, may not be sufficient: globally
synchronized financial markets require globally convergent financial
standards. International coordination is critical to ensure that efforts
to promote safety and soundness in one major financial jurisdiction are
reinforced and not undermined by other jurisdictions, globally active
institutions are overseen by globally coordinated authorities, and the
playing field is level. That is why we are pursuing a common agenda
across the major financial jurisdictions through the G-20, the FSB, the
IMF, and the international standard setting bodies.
But while our domestic reforms are comprehensive, our efforts to
achieve international convergence are selective. Where financial
activities and transactions migrate rapidly across borders in response
to minute differentials, we are working to achieve international
harmonization. Where longstanding differences in national institutions
and business models call for tailored national solutions, we are working
internationally to share best practices and principles. And where
cooperative action across borders is needed, we are working to establish
complementary national regulatory foundations coupled with international
frameworks for cooperation.
Achieving Convergence on Capital, Derivatives, and Hedge Funds
Why do we need convergent international financial regulatory
standards? I’d suggest that we can answer that question by simply
looking around the room. Decades of technological innovation and
globalization have created an interconnected financial system that
requires convergence on core standards to ensure safety and soundness no
less than fairness.
The two biggest issues in this camp are capital and OTC
derivatives.
Capital is at the core of the system. Failures in our system of
capital requirements contributed centrally to the severity of the
crisis. Where we had capital requirements, they were too low and they
were not supplemented with complementary liquidity requirements. A set
of financial institutions were allowed to emerge in the shadows of the
banking system with no capital requirements at all. And capital
standards were not applied consistently around the world, with banks in
some jurisdictions allowed to operate with low levels of capital
relative to the risks they took on.
At last year’s Pittsburgh Summit, President Obama and other G-20
Leaders, called for financial institutions to raise the quality and
quantity of capital, strengthen liquidity standards and implement rules
to limit leverage. Strengthening capital requirements and ensuring more
stable funding for major financial institutions was an important
objective of our domestic legislation. Together, the Dodd-Frank Act and
the Basel III capital framework are designed to ensure that major
financial institutions here and around the world are subject to rigorous
and consistent capital requirements.
The new Basel III capital accord will significantly tighten the
system of global capital requirements in a number of important ways.
The new rules will increase the proportion of capital that must be in
the form of common equity-the form that can best absorb losses-and will
restrict forms, such as deferred tax assets, which proved to have little
value during the crisis. Banks will be required to hold more capital
against the kinds of risky products and activities that caused such
damage two years ago. In addition, the new Basel framework will apply a
leverage ratio to banks. And Basel III will impose minimum liquidity
requirements for the first time to help banks weather unexpected funding
shocks.
The new Basel III requirements will be the bedrock of the new, more
resilient global financial system, and America is committed to implement
Basel III.
Similarly, the opaqueness of the OTC derivatives market contributed
centrally to the uncertainty that sapped market confidence in the
crisis. Lack of understanding about derivatives exposures made it
difficult for firms to fully assess counter party risk. This added to
the reluctance to extend credit and was a further drain on liquidity.
Recognizing the global reach of these markets, we have worked
internationally to develop common standards for derivatives trading.
G-20 Leaders committed to bring standardized OTC derivatives trades onto
organized trading platforms, as appropriate. Leaders also committed to
ensure that all standardized contracts would be executed through central
counterparties, to help reduce bilateral exposures between firms.
Finally, Leaders called for all OTC contracts to be reported to trade
repositories, so that supervisors could better monitor systemic risks.
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** Market News International Washington Bureau: 202-371-2121 **
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