Treasury Wants Banks to Hold More Capital

The U.S. Treasury on late Thursday said it supports requiring banks to hold bigger capital cushions to guard against a repeat of the financial crisis.
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WASHINGTON (

TheStreet

) -- The U.S. Treasury on late Thursday said it supports requiring banks to hold bigger capital cushions to guard against a repeat of the crisis from which the financial sector is slowly emerging.

If adopted, these measures would limit profitability for banks, while bringing stability to the sector. The statement is impressive not just because it clearly supports tougher capital rules, but also because it sets a very fast timetable for reform, saying "a comprehensive agreement on new international capital and liquidity standards should be reached by Dec. 31, 2010 and should be implemented in national jurisdictions by Dec. 31, 2012."

In order to be meaningful, the adoption of the capital rules would require international cooperation. Regulators around the world typically follow the lead of the Basel Committee on Banking Supervision in Switzerland in deciding how much of a capital cushion to require banks to hold.

Adair Turner, the head of Britain's top regulatory body, has also come out strongly in support of higher capital requirements for banks. He, too, has set a timetable comparable to the one proposed by the Treasury. 

If the rules are put in place, it would likely drive banks to sell more equity to bring themselves into compliance with the new rules. That would dilute shareholders at all large banks, though it would give a temporary revenue boost from underwriting fees for

Goldman Sachs

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,

Morgan Stanley

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,

Citigroup

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,

Bank of America

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and others with large investment banking franchises.

--

Written by Dan Freed in New York

.