U.S. Secretary of Treasury Timothy Geithner makes a point testifying before the House Financial Services Committee on "The State of the International Financial System" on Capitol Hill in Washington, March 20, 2012.LARRY DOWNING
Treasury Secretary Timothy Geithner said he disagrees that proposed U.S. financial rules would affect sovereign debt markets, a rebuke of critics in Canada and elsewhere who have pointedly argued the opposite.
Mr. Geithner's comments, made during congressional testimony Tuesday, suggest those lobbying for changes to efforts by the Obama administration to avoid future Wall Street bailouts could still have some persuading to do.
At issue is the Volcker Rule, which seeks to limit the trading of U.S. financial institutions that benefit from taxpayer-funded backstops. Broadly, banks would be barred from buying and selling financial assets for their own profit. The idea, conceived by former Federal Reserve Chairman Paul Volcker, is to reduce the risk of a big deposit-taking institution ever requiring a bailout.
But there are exceptions. One involves U.S. Treasury debt. Financial institutions would continue to be allowed to trade Treasuries freely to ensure the market remains broad and deep. European countries, Japan and Canada are among the nations who want the same exemption extended to their debt. They argue that the Volcker Rule could result in less demand for their bonds, which could cause their borrowing costs to rise.
"The restrictions on U.S. banks' participation in the market for Canadian government securities would restrict competition and liquidity in these markets and ultimately undermine the resilience of the Canadian financial system," Bank of Canada Governor Mark Carney wrote in a Feb. 13 letter to his counterpart at the Federal Reserve, Ben Bernanke.
Mr. Geithner, who was copied on Mr. Carney's letter to Mr. Bernanke, delivered something of a response while taking questions on the European debt crisis during testimony at the House Financial Services Committee. Mr. Geithner was asked to address international concerns about the Volcker Rule, and whether the U.S. risked inadvertently adding to the pressure on European borrowing costs.
The Treasury secretary said his personal view is that the Volcker Rule as written wouldn't have a "meaningful" impact on sovereign debt markets.
"I don't think there is that risk, but if there is that risk, we'll address it," Mr. Geithner said.
The Volcker Rule is one aspect of the Dodd-Frank Act, the broad overhaul of U.S. financial regulation that constitutes hundreds of pages. As the main banking regulator, it's the Fed that is in charge of implementing much of the Dodd-Frank plan, including the Volcker guidelines. It intends to finalize rules later this year.