Treasury Secretary Timothy Geithner (Photo: U.S. Treasury Department)

(CNSNews.com) – Treasury Secretary Timothy Geithner has told a conference of international bankers that the rest of the world, notably countries in Asia and Europe, should join the United States in increasing regulations on their financial markets in the wake of the 2008 global financial crisis.

If such countries did not follow the U.S. government’s lead, Geithner indicated, then U.S. firms could move their business abroad or take advantage of different regulatory regimes in order to make a profit.

“We are committed to building a more level playing field internationally, as we move ahead with reforms in the United States,” Geithner told the International Monetary Conference in Atlanta, Georgia Monday. “We don’t want to see another race to the bottom around the world.  As we act to contain risk in the U.S., we want to minimize the chances that it simply moves to other markets around the world.”

Geithner said foreign countries should follow the U.S. in passing legislation similar to the 2010 Dodd-Frank Act. In the wake of the Basel III financial regulations agreement reached by central banks and supervisors last year, he said, foreign countries should work with the U.S. to determine essentially how profitable major financial institutions should be allowed to be, without driving them to do business in countries without high levels of regulation.

“There is a very strong case for requiring the largest firms, those whose failure could cause the greatest damage to the economy, to hold more capital relative to risk, than smaller institutions,” Geithner said.

“The question is how much,” he continued. “In making this judgment, the central banks and supervisors need a balance between setting capital requirements high enough to provide strong cushions against loss but not so high to drive the re-emergence of a risky shadow banking system.”

Geithner essentially wants other countries to work with him to create a global financial regulatory standard that limits how much money firms must hold in reserve, based on how much lending and other financial business they do. By limiting how much money firms have to hold in reserve, these types of regulations effectively limit how much risk-based business – such as lending and financial trading – firms can engage in and thus how much money they can make.

On the other hand, he claims that such limitations are necessary to prevent another financial crisis, should multiple large firms again lose large amounts of money.

Geithner also said there needed to be a global standard for regulating financial instruments known as derivatives. Used extensively prior to the 2008 crisis, derivatives are contracts that allow investors to trade on the price of an asset, such as a mortgage or a commodity like oil, without actually owning the asset or commodity. Usually, firms sell derivatives to allow investors to speculate on whether the price of something will go up or down.

Geithner said that other countries needed to join with the U.S. in regulating this large financial market. He argued that preventing firms from creating and trading derivatives freely would reduce risk to the system.

“A core element of this framework is to require standardized derivatives to be centrally cleared,” he told the Atlanta gathering. “This replaces the exposures of an exceptionally complex web of millions of bilateral trades with a central counterparty that has strong financial safeguards and comprehensive oversight.”

In other words, Geithner wants the rest of the world to follow the U.S. in having government create a special market for derivatives, in which government-approved types of derivatives could be traded and tracked.

“Just as we have global minimum standards for bank capital – expressed in a tangible international agreement – we need global minimum standards for margins on uncleared derivatives trades,” Geithner said.

“A global approach to margin will help prevent regulatory arbitrage and a ‘race to the bottom.’ It will make our global financial system safer and stronger.”

As with the capital requirements, therefore, if other countries do not regulate their financial systems more heavily too, then firms will move their business to those less-regulated markets where they can make more money.

Geithner attacked opponents of such reforms, saying that they were contributing to the problem of government regulators being out-classed and out-smarted by the private sector.

“This is not a new challenge, but we face two new risks in addressing it.  One is the effort by politicians and groups that oppose financial reform to starve the regulatory agencies of the resources they need to carry out their new responsibilities. The second is to use the confirmation process to block appointments.”

Geithner said that private sector actors should be for, not against, having smart, savvy regulators.

“Those of you here today who are leaders of the major U.S. financial institutions should be champions, not opponents of getting strong capable people to lead and staff the oversight bodies.”