Central bankers seek tougher bank capital rules

FRANKFURT/BRUSSELS (Reuters) - Banks must hold more capital to avert the need for government bailouts but steps to raise their capital buffers must be carefully timed, European central bankers said on Thursday.

"One must not come to the central bank to avoid bankruptcy. We need a permanent dialogue and exchange of information," Belgian central bank governor Guy Quaden said in an interview.

The G20 group of developed and emerging economies meets in the U.S. city of Pittsburgh on Thursday and Friday for the third time since the crash of Lehman Brothers bank last September sparked a near meltdown of the financial system.

G20 leaders have pledged to regulate all parts of the financial system more closely and require banks to top up capital, with the summit set to refine these pledges.

European Central Bank Governing Council member Axel Weber expects good progress in Pittsburgh.

"We will further develop global rules, work on globally identical standards for banks' capital, for liquidity, for remuneration systems and I think it is important to have globally oriented regulation and identical rules and that has been lacking," Weber told Deutschlandfunk German radio.

Even higher capital requirements for banks whose failure could destabilize the financial system is top of the G20 agenda.

Chancellor Angela Merkel pressed for sweeping regulation of international finance, saying no bank should be allowed to be so big that it can "blackmail states again."

If banks become "too big to fail" they enjoy implicit government guarantees and should be more heavily supervised, said Ewald Nowotny, a member of the ECB's Governing Council.

There should also be a mechanism that stops governments from having to step in, Nowotny said.

"One idea is that capital requirements could rise disproportionally for bigger banks, so that (they) have to pay something like an insurance premium if (they) are a system-relevant bank," Nowotny said. The Basel Committee on Banking Supervision, which drew up the current globally-agreed Basel II accord on bank capital requirements, is already working to toughen them up.

Finalization of the new, higher levels of capital requirements are expected next year but it may not be easy.

"I guarantee there's no consensus on the right level of capital," Brian Peters, senior vice-president, risk management, at the Federal Reserve Bank of New York, told a conference in Frankfurt.

THREAT TO RECOVERY

Some G20 countries also fear that forcing banks to hold higher levels of capital too soon could threaten economic recovery by choking off lending.

"We need to keep our eyes on the big picture," Bundesbank Vice-President Franz-Christoph Zeitler told a banking conference, urging regulators to keep the impact of the long list of proposed bank reforms in mind.

The Basel rules have tended to amplify the crisis, he said. "Regulators wishing to avoid this having a knock-on effect on banks' ability to lend should therefore not implement capital measures until the crisis has been safely resolved," Zeitler said.

Heavier regulation will result in lower profits for banks, Deutsche Bank (DBKGn.DE)'s chief said.

"The political will is clear: there will be stricter limits for the banking sector and the profitability of the financial sector as a whole will be lower," Deutsche Bank Chief Executive Josef Ackermann said in an article published in Swiss daily Neue Zuercher Zeitung on Thursday.

However, some banking observers think tighter supervision and higher capital requirements for big banks might make them look safer, giving them an advantage over smaller lenders.

Alexander Batchvarov, managing director for international structured product research at Merrill Lynch bank, said regulators should fix the goalposts.

"Looking at the way it is now the goalposts will be moving every year for the next three to four years and that's not helpful for financial stability," Batchvarov said.

(Writing by Huw Jones, reporting by Madeline Chambers in Berlin, Krista Hughes and Jonathan Gould in Frankfurt, Antonia van de Velde in Brussels; Editing by Ruth Pitchford)