U.S. Treasury Secretary Timothy F. Geithner said he wants globalminimum standards on derivatives trading and urged regulators toavoid a “race to the bottom” in which financial risk moves to theleast-supervised economies.

“We need global minimum standards for margins on unclearedderivatives trades,” Geithner said today in a speech in Atlanta.“Without international consensus, the broader cause of centralclearing will be undermined. Risk in derivatives will becomeconcentrated in those jurisdictions with the least oversight. Thisis a recipe for another crisis.”

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

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

Capital Size
Geithner said the size of thecapital requirement for the largest systemic institutions should bebalanced.

“The central banks and supervisors need a balance betweensetting capital requirements high enough to provide strong cushionsagains0t loss but not so high to drive the re-emergence of a riskyshadow banking system,” he said. “They also need to look at thefull impact of other reforms in the system that have the effect ofreducing both the probability of failure of large institutions andthe ability of the rest of the financial system to absorb orcontain or diffuse those losses.”

The Dodd-Frank Act mandates the establishment of heightenedcapital standards for banks with assets over $50 billion andsystemic institutions. In addition, global regulators are hammeringout accords in Basel, Switzerland, that would more than double theminimum common equity requirement for banks.

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

Largest Firms
In the U.S., Geithner saidregulators will require the largest U.S. firms to hold anadditional surcharge of common equity. He added that regulators “donot need to impose on top of that requirement any of the threeother proposed forms of additional capital — convertible, bail-in,contingent capital instruments or counter-cyclical capitalrequirements.”

The United Kingdom's “experiment in a strategy of 'light touch'regulation to attract business to London away from New York andFrankfurt ended tragically,” he said. “That should be a cautionarynote for other countries deciding whether to try to take advantageof the rise in standards in the United States.”

Geithner said the U.S. “will do what we need to do to make theUnited 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 ofCorporate Treasurers and the Business Roundtable are among lobbyinggroups pressing regulators to ensure that corporate end-users ofderivatives don't need to set aside margin in their swaptransactions to reduce risk. The companies say such a requirementwould force them to set aside millions of dollars that could beinvested elsewhere.

Appointments Blocked
Geithner criticizedsome U.S. lawmakers for using the confirmation process to blockappointments. Nobel laureate Peter Diamond, nominated three timesby President Barack Obama to serve on the Federal Reserve's boardof governors, withdrew his nomination today following oppositionfrom Senator Richard Shelby of Alabama, the senior Republican onthe Senate Banking Committee.

“Those in the U.S. financial community who are supporting theseefforts to block resources and appointments are looking forleverage over the rules still being written. There is a longtradition of similar efforts,” Geithner said. “They will not besuccessful in undermining the core elements of reform, but theywill risk causing a different type of damage.”

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

BloombergNews

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.