Global cooperation will be crucial to hardening world banks' capital armor along the lines backed by Congress and the Obama administration, senior U.S. regulators said on Tuesday.

As standard-setters in Switzerland hammer away at a new set of worldwide bank capital standards, U.S. Treasury Department official Lael Brainard said, Capital rules must be harmonized internationally to be effective domestically.

More broadly, she told a Senate subcommittee, the tougher financial regulations that are headed for President Barack Obama's desk to be enacted on Wednesday will be less effective without global consensus on some key policies.

In many of these areas ... if we are not able to achieve convergence, we won't be able to protect American consumers, businesses and workers the way that this legislation would like to, said Brainard, who is Treasury's under secretary for international affairs.

Setting a high hurdle for the rest of the world, the U.S. Congress on Thursday approved the biggest overhaul of bank and capital market regulation in decades.

Obama is expected to sign the far-reaching bill into law on Wednesday, and regulators will spend the next two years fleshing it out and implementing it.

A major part of the bill forces banks to hold more capital to withstand crises better than they did during the 2007-2009 credit crunch and this year's debt crises in Europe.

Bank profits are threatened by such steps, and Congress has left the nitty-gritty details of higher standards to a slow-moving international standard-setting process that has already been grinding away for several months.

BASEL PANEL ON TRACK

The Basel Committee of central bankers and supervisors, based in Switzerland, is in the process of writing new, higher bank capital and liquidity requirements, as ordered months ago by the Group of 20 nations. The committee is on track in writing rules, but the implementation timetable has slipped.

The G20 said in June it will approve the new Basel package in November, but signaled that countries will get more time to implement changes beyond the original end-of-2012 deadline.

Momentum behind the new standards is strong and some banks are already taking steps in anticipation of them.

Federal Reserve Governor Daniel Tarullo told the Senate banking subcommittee at a public hearing that higher capital standards for large financial firms are vital to making the world financial system more stable and resilient.

Our view is that large institutions should be sufficiently capitalized so that they could sustain the losses associated with a systemic problem, said Tarullo, the Fed's point man on regulatory issues. Meeting this standard will require considerable strengthening of existing requirements.

Many U.S. banks have already shored up their balance sheets since the 2007-09 crisis that slammed economies globally. But some still have a long way to go in this regard, and many EU banks' capital strength levels are seen as shaky.

Europe is right now running stress tests of how 91 banks across 20 countries would cope with another shock like Greece's sovereign debt crisis. The Committee of European Banking Supervisors (CEBS), which is overseeing the tests, said results would be released on Friday.

EU STRESS TESTS EYED

Brainard told the Senate panel that the tests could help to strengthen bank balance sheets in Europe.

She said, The lesson is clear: more and higher quality capital must be at the core of our efforts to ensure a more resilient financial system less prone to failure.

But Democratic Senator Evan Bayh, who chaired the hearing, expressed a widely held concern about the EU tests.

There are some disturbing reports that maybe they won't be quite as transparent as we might like because of what the results might show, Bayh said.

The legislation headed for Obama's desk -- approved by Congress after more than a year of debate -- orders regulators to increase capital requirements on financial firms as they get bigger and take on riskier activities.

It also creates a government watchdog to protect financial consumers; gives authorities a new way to dismantle troubled firms; curbs risky trading by banks; and cracks down on the unpoliced over-the-counter derivatives market.

In areas such as derivatives regulation, global cooperation will be key to preventing a new wave of regulatory arbitrage in which firms shop around for the least-strict national regime, moving jobs and trading volumes with them, officials said.

There's always going to be arbitrage opportunities given the nature of markets, but cooperation will minimize that, said Securities and Exchange Commission member Kathleen Casey.

(Additional reporting by Glenn Somerville and Pedro Nicolaci da Costa in Washington, Huw Jones in London; Editing by Eric Walsh)

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