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Plans to de-risk 'too-big-to-fail' banks face hurdles in Europe, Asia

Bank of England governor and Financial Stability Board Chairman Mark Carney delivers a Financial Stability Board media briefing at the Bank
Bank of England governor and Financial Stability Board Chairman Mark Carney delivers a Financial Stability Board media briefing at the Bank

By Huw Jones

LONDON (Reuters) - Global plans to prevent taxpayers from having to pay for big bank failures are at risk because banking supervisors in Europe and Asia do not fully support some of the proposals aimed at drawing a line under the 2007-2008 financial crisis.

Governments have paid out billions of taxpayer dollars to bail out large banks in trouble because of fears that the fallout from a big collapse would be too damaging.

But leaders of the world's major economies - the G20 - want to put an end to the "too big to fail" phenomenon. They want the world's biggest 29 banks to hold enough capital and bonds that in a crisis they would not have to be rescued by governments.

The G20's regulatory arm, the Financial Stability Board (FSB), wants them all to hold a common "cushion" of bonds that can be converted to equity to help rescue or "bail in" the bank if all other capital has been burnt through.

But there is resistance among supervisors in Europe and Asia to banks having to hold what would be another layer of capital.

FSB Chairman Mark Carney wants a draft rule on the "bail in" bonds by November, when G20 leaders meet in Australia so they can move on from crisis clean-up to growth promotion. Supporters of a global standard say it is needed because big banks operate across borders.

"It's very much in the interest of the industry to find a solution to this because we want to get a consensus on the view that too big to fail has been eliminated," David Schraa, regulatory counsel at the Institute of International Finance, a global banking lobby in Washington, said.

But bankers, bank industry associations and regulators familiar with work on the new "bail in" rule say Asian bank supervisors argue that big banks in the region have enough capital already and do not need the additional cushion or "debt shield." They did not want to specify which Asian countries.

Banks around the world are already having to hold far more capital from 2016 as a result of new rules to strengthen them since the financial crisis.

In the European Union, central bankers argue EU banks will already have to contribute to central funds for winding down failed banks and hold bail-in debt under new European laws.

Industry regulators in the EU also want the bail-in debt required in Europe to be accepted as a substitute for what the FSB is planning. Some banking supervisors in Europe also argue that capital banks already hold above minimum requirements should count towards bail-in debt.

In addition, this year's EU bank stress test is already pushing banks to raise capital so supervisors are wary of making additional demands on them to issue bail-in bonds.

GLOBAL DEBT SHIELD

Regional bickering over the plans highlights the difficulty of getting agreement on a one-size-fits-all rule that applies across the world.

But failure to get a global consensus will give free rein to regulators to do their own thing, creating a patchwork of rules that would make it tough to wind down an international bank.

For example, the U.S. Federal Reserve may propose its own "debt shield", requiring foreign banks to hold capital and liquid assets in the country to protect its taxpayers.

Regulatory "hawks" like the United States and Britain want quite detailed rules, while some Asian countries prefer less defined principles, banking officials said.

There are a range of views to be taken into account and refined and many tough issues remaining, a person with knowledge of the new rule said. "There will also be issues with banks that are deposit rich and don't feel the need to issue more debt instruments," the person said.

The FSB declined to comment. It will publish the draft rule for public consultation after summit in November.

The world's biggest banks are already expected to hold a capital buffer equal to about 10 percent or more of risk-weighted assets. The extra cushion or debt shield would come on top of this.

"People are talking about total (debt shield) and capital in the range of 17-20 percent," a U.S. banking official said.

A source at a European bank that will need a debt shield expects it to be around 10-13 percent, bringing total debt and capital buffers to 20-25 percent.

"On the quantity ... we are not seeking an amount ... capable of resurrecting any failing bank including the global giants," Bank of England Deputy Governor Jon Cunliffe said this week in the first comments of substance on the subject from a senior policymaker.

We want there to be sufficient capital to recapitalize the banks that are carrying out critical economic functions to a level where they can regain and maintain market access, he said.

Even if a global standard is eventually agreed, there are doubts it will prevent individual regulators from making their own rules or push them to get rid of existing ones, such as the Fed's capital requirement for foreign banks.

"I don't see the Fed doing that anytime soon," Kenneth Bentsen, chief executive of banking lobby the Global Financial Markets Association, said.

While the regulators argue, markets are already anticipating the demise of too big to fail, an event which is expected to increase banks' funding costs.

"You have to embrace bail-in as there is no other alternative," Philippe Bodereau, global head of financial research at bond fund PIMCO, told a conference on Thursday.

"If a large U.S. bank defaults tomorrow, one thing I am pretty sure of is that Congress is not going to give any money to recapitalize, so the era of too big to fail is probably over," Bodereau said.

(Reporting by Huw Jones. Editing by Jane Merriman)

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