As President Obama prepares to sign into law sweeping reforms of the U.S. financial system, regulators stressed Tuesday the importance of ensuring that foreign regulators follow suit.
"Capital rules must be harmonized internationally to be effective domestically," said Lael Brainard, under secretary of international affairs for the Treasury.
Testifying before a Senate Banking subcommittee on Tuesday, she said tougher regulations would be less effective with the lack of a global consensus on key policies.
"Without internationally consistent standards, large financial firms will tend to move their activities to jurisdictions where standards are looser and expectations of government support are stronger," she said. "This can create a race to the bottom and intensify systemic risk throughout the entire global financial system."
Regulators said international cooperation has improved in the wake of the financial crisis. Last month in Toronto, leaders of the G-20 industrialized nations agreed to work toward global standards for minimum bank capital levels and a new liquidity requirement.
The group also a set a goal of a comprehensive agreement by November when it meets again in Seoul for the next summit.
In testimony, Federal Reserve Board Gov. Daniel Tarullo said the U.S. agrees with the G-20 on setting minimum capital requirements to help banks withstand stresses like the recent financial crisis without "extraordinary government support."
"Our view is that large financial institutions should be sufficiently capitalized so that they could sustain the losses associated with a systemic problem and remain sufficiently capitalized to continue functioning effectively as financial intermediaries," he said.
Still, though stressing the importance of adopting robust capital and liquidity rules, Tarullo said it was "neither practical nor desirable to negotiate all details of financial regulation internationally." He also said the U.S. should "preserve flexibility to adopt prudential regulations" that best suit its financial and legal system.
The Basel Committee on Bank Supervision is working on capital initiatives, he said, that would go beyond the measures expected to be completed this fall, including creation of contingent capital and countercyclical capital buffers.
At the hearing, regulators largely endorsed the Dodd-Frank Act, noting that many of its pieces are closely aligned with efforts by the G-20, Financial Stability Board and Basel Committee.
Even so, Tarullo said, some aspects of the bill are "unlikely to become part of the international financial regulatory framework," such as the Volcker Rule barring U.S. banks from proprietary trading and investing in or sponsoring private investment funds.