Citigroup, one of the largest banks in the nation and the world, is calling for Washington to tread slowly on the Basel III rules for capital reserves at financial companies, before the rules constrict access to credit and regulators drive banks to distraction with different interpretations of the new standards.

In testimony released today, in advance of a House Financial Services Committee hearing about Basel III on Thursday, Citi executive James Garnett said the bank “broadly supports the goals of Basel III” but immediately added that “we are concerned that the cumulative capital levels will unnecessarily constrict credit for all but the nation's most credit-worthy borrowers.” He went on to say one practical effect of the rules might be to curb banks' appetite for buying mortgage-backed securities—a vital part of any sustained recovery in the housing market—and worried that U.S. and global financial regulators will not oversee implementation of the Basel III accords evenly.

Garnett is the head of risk architecture for Citi, and point-man at the bank for compliance with the new rules. To some extent, banking industry calls to reform Basel III are academic; regulators have already announced that they would postpone the start date of the rules from Jan. 1, 2013—without specifying any future effective date. Full implementation of Basel III was not scheduled until 2019 anyway. Regardless, any voices calling for slower or less vigorous implementation of regulatory reform are bound to get a receptive audience from the Republican-led House committee.

Garnett also devoted a considerable part of his testimony to changes in accumulated other comprehensive income (AOCI), and how Basel III will force banks to report fluctuations in asset value more quickly—which in turn would affect the banks' capital requirements, and (Garnett says) distort the capital reserves a bank would truly need given the risk in its balance sheet. Current rules allow banks to use a “filter” that keeps unrealized gains and losses on securities held as “available for sale” from affecting capital levels; Basel III would eliminate that filer.

The removal of that filter will cause banks to favor shorter duration securities over longer-dated Treasuries and mortgage-backed securities, Garnett said, because the value of shorter duration securities is less subject to swings in interest rates. “This will inevitably impact the issuance and cost of Treasury securities and housing credit,” he said. Garnett also noted that ending the filter will put U.S. banks at a disadvantage because foreign banks typically file financial statements under International Financial Reporting Standards, and IFRS allows filers to defer gains and losses by accounting for certain debt securities as loans.

And to little surprise, uneven application of Basel III rules was another worry. "There is a great deal of concern that supervisors in some countries, like the U.S., will adhere to high standards of approval while those in other countries will adhere to laxer standards,” Garnett said.