Treasury Secretary Timothy Geithner sent a detailed letter to the finance ministers from the Group of 20 industrial and developing nations calling for tough new capital rules for the world’s largest banks. The standards, which Mr. Geithner said should be agreed on by the end of 2010 and implemented by the end of 2012, would call for much higher capital requirements at banks and require a much higher quality capital, with a heavy emphasis on equity.

U.S. officials have called for tougher capital requirements for months, but Mr. Geithner’s detailed proposal comes as many European leaders have shifted their focus on bank regulation to things such as limiting the size of banks and caps on bonuses. So the U.S. proposal could be controversial and set up a clash of top regulators as fault lines form over the best way to supervise banks.

In his “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms,” Mr. Geithner calls for:

1) capital requirements that are designed to protect the stability of the financial system and individual banks. In other words, reduce the ability of banks to “accumulate” risk during boom times by requiring them to hold more capital during boom times.

2) all banks to hold more capital and the biggest banks to hold even more capital than that. No large financial companies should be able to evade these limits.

3) a greater emphasis on the quality of capital. Higher quality capital means it is better able to absorb losses. Voting common equity should represent a large majority of a bank’s tier 1 capital.

4) risk-based capital requirements that reflect the risk of a bank’s exposures. Reduce the reliance on a bank’s internal models to dictate what their capital requirements should be. Regulatory capital ratios should reflect more accurate information about the health of a bank.

5) a way of addressing the huge problem caused by procyclicality, which essentially means that banks have little capital to spare when times are bad because they were able to hold less capital when times are good. This has been a huge issue that policy makers have struggled with for years, and Mr. Geithner has several pages worth of ideas on this front.

6) a “simple, non-risk-based leverage constraint.” G-20 leaders have agreed to this in principle, but it has not yet been implemented. It would make it harder for banks to game risk-based capital standards because there would be a capital floor they couldn’t fall below.

7) a conservative and explicit liquidity standard. This is something regulators have been emphasizing in the last year and many consider as important as capital standards.

8) ensuring that tougher capital requirements don’t allow firms to migrate to places where such capital requirements don’t exist. In other words, keep the playing field balanced and don’t allow huge risks to buildup in the system outside of regulation.