House Republicans blasted the proposed Basel III capital standards on Wednesday, arguing the plan would make the system more uncertain without making it substantially more safe.
"The administration has failed once again to give Americans the certainty they need," said Rep. Spencer Bachus, the leading Republican on the House Financial Services Committee, during a hearing.
He said it's still unclear how much capital banks will need to raise, or how many businesses will be denied credit in order for banks to comply with Basel III.
"The reason we don't know is that we're still trying to figure out how the administration is going to implement the new standards, and how those new standards will interact with Dodd-Frank," Bachus said. "Until these questions are answered, it is impossible to say whether the Basel process will yield a more substantial global banking system, or instead serve as yet another obstacle to economic recovery."
Rep. Jeb Hensarling, R-Texas, said economic recovery won't begin until the administration takes steps to "remove the uncertainty."
"This economy does not suffer from a lack of capital. It suffers from a lack of confidence," Hensarling said. "Between the health care bill, the tax increases, the financial regulation bill, cap and trade and our mind-boggling debt — job creators are mired in uncertainty and feel nothing but hostility from this president and this Congress."
Treasury Secretary Tim Geithner attempted to rebut such claims, arguing that the new rules would not hurt the economy. Geithner noted that the Basel Committee on Banking Supervision provided banks with a "meaningful transition period," giving them ample time to raise capital. "For the most part, banks should be able to meet these new requirements through future earnings, which will help protect the recovery currently underway," he said.
Under the agreement, new capital standards will take effect at the beginning of 2013. Banks have until 2015 to raise their common equity capital ratio to at least 4.5%. A buffer that is intended to help banks shore up funds during boom times will be phased in between 2016 and 2018.
Geithner said that the definition of capital, which will become "progressively more stringent," won't take full effect until 2018.
Still, Geithner acknowledged uncertainty in the future, but stressed that tougher capital rules would help to ease the severity of possible future financial crises.
"We cannot know with certainty how the economy and the financial system will evolve, but these heightened capital requirements, along with other important reforms, should substantially reduce the likelihood that we will soon repeat the sort of severe financial crisis that we have just lived through," he said.
There are still several pieces that Basel negotiators are looking to iron out, including liquidity requirements, as well as certain additional requirements that will be tacked on for the most systemically important institutions. The leaders of the Group of 20 nations are expected to sign off on the agreement in November when they meet in Seoul.
"We will need to make sure that they are calibrated correctly before they are fully implemented," Geithner said of the liquidity requirements.
Geithner also warned of the importance of individual countries implementing the new capital standards to ensure a "level playing field" throughout the global financial system.
"We will engage our foreign counterparts to look for ways to ensure that these agreements are implemented in a transparent and consistent way by supervisors in different countries," he said.
