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Banking Reform

Earlier today Tim Geithner addressed a gathering of community bankers and revealed that the administration is eager to start working on managing systemic risk and the banking reform that would logically follow. It's pretty clear that once we recover from this financial storm, larger banks will be subject to stiffer capital requirements to ensure adequate capital reserves to minimize the chances of a recurrence of too big to fail. This has broad implications including reduced leverage and the earnings that usually follow. From Real Clear Markets:

 

Geithner also said the administration will propose an overhaul of financial regulations in the next several weeks.

A core part of the reforms will be to require large banks to hold more capital and less debt as part of a "more conservative set of constraints" on those institutions, he said.

The administration also will propose that big banks pay into a separate fund to be used for winding down large, failed banks. The fund would be similar to the Federal Deposit Insurance Corp.'s deposit insurance fund, Geithner said.

Administration officials have previously said they plan to roll out reform proposals in June.

Due largely to the government's efforts, "the financial system is starting to heal" and "a substantial part of the adjustment process is now behind us," Geithner said.

Still, the administration wants to move on an overhaul of the nation's financial rule book "while memory of the damage of the crisis is still acute," he said.

Geithner also drew applause when he said the administration supports increasing the cap on the FDIC's authority to borrow from the Treasury, to $100 billion from $30 billion.

That idea is popular because it could allow the FDIC to reduce the fees it charges banks.