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Geithner's Letter Shows Opposition to Fixed Capital Requirements In Reform Bill

In a letter sent last January, Treasury Secretary Geithner indicates his opposition to fixed capital requirements in financial reform legislation. He favors capital requirements to prevent problems like those that sunk Lehman Brothers, but doesn't want a numerical requirement written into the law.

Remember how earlier this week, in a post about financial reform and liquidity requirements, we noted how vague Treasury Secretary Tim Geithner was being with The New York Times about setting hard and fast rules about how much cash should be required to hold? Here's what we excerpted from the Times on Tuesday:

Mr. Geithner insists that if there is one change that needs to be made to the banking system to protect it against another high-stakes bank run like the one that claimed the life of Lehman Brothers, increasing capital requirements is it.

But try pinning down Mr. Geithner, or anyone else in the Beltway, on how much capital banks should be required to keep, or even how the word “capital” should be defined, and certainties disappear.

Turns out he had a lot more to say on the subject than what he told the Times. Mike Konczal, blogging for Ezra Klein, unearthed a letter Geithner sent to a lawmaker in January, explaining his hesitancy -- really, his opposition -- to setting fixed capital requirements in current financial reform proposals. From the letter:

Although the Administration strongly supports imposing a simple, non-risk-based leverage constraint on banks, bank holding companies, and other major financial firms, we do not believe that codifying a specific numerical leverage requirement in statute would be appropriate.

So when Geithner said, “We have not made a judgment yet on the number,” what he really was thinking -- if this letter is any indication -- is that as far as financial reform legislation itself goes, he doesn't want a number, period. And when it comes to actually imposing tighter capital requirements on financial institutions, he wants the Treasury, the Fed or some combination of regulators to have a free hand to pick and change the number. In other words, pretty close to the way things are now.

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