UPDATE 2-SNB's Jordan supports capital surcharge for big banks

* Swiss National Bank backs surcharge on big banks

* SNB opposes size curbs to cut banking risks

* Deutsche Bank doubts market appetite for capital raising

* FSB looking at ways to curb role of credit ratings

(Adds Deutsche Bank comments)

By Krista Hughes and Sakari Suoninen

FRANKFURT, Aug 27 (Reuters) - Large and important banks should pay a capital surcharge so their failure would be less destabilising for the financial system, Swiss National Bank Vice-Governor Thomas Jordan said on Friday.

"We believe that systemically important institutions should have a surcharge requirement for capital and this should be built in a progressive way," he told a forum on financial regulation at the European Finance Association annual meeting.

Jordan said the SNB opposed size restrictions, for example on balance sheets, and said a lengthy period of time was needed to implement new regulations.

Switzerland has led the global push for tighter banking regulation requiring big banks to hold more capital and to meet stricter rules on liquidity after the country had to rescue its largest bank, UBS (UBSN.VX)(UBS.N), at the height of the financial crisis. [ID:nLDE63L1FD]

Regulators across the world are looking for ways to avoid a repeat of how allowing a big bank like Lehman Brothers to fail in September 2008 sent the global financial system to the brink of meltdown and sparked a string of taxpayer rescues of banks.

So far there is no clear consensus for some of the solutions for tackling "too big to fail" banks, such as capital surcharges or splitting up operations to ringfence deposit holders.

The United States has passed a law requiring some banks to curb risk by spinning off trading operations, a step Europe has rejected. A British commission due to report within a year may propose splitting up some banks.

The Financial Stability Board (FSB), tasked by the Group of 20 leading countries to forge a global approach to regulation, will publish proposals in November on how to tackle "too big to fail" banks, including possible extra capital surcharges and what it calls structural constraints.

LINE OF DEFENCE

Aside from possible surcharges, banks already face having to improve their basic capital levels under new rules known as Basel III that take effect from 2012.

A Deutsche Bank (DBKGn.DE) official said there was a limit to how much capital can be raised and other remedies could be emphasised such as better internal risk management at banks.

"We can't just raise capital across all banks in the next 1-2 years. There is no appetite in the market," said Christian Sewing, chief credit officer at Deutsche Bank in London.

FSB Secretary General Svein Andresen said emphasising capital levels was not misplaced and that banks can make mistakes in assessing risks.

"The line of defence is capital and liquidity buffers," Andresen said.

A Swiss government commission report with recommendations to limit the risk of a possible failure of one of the country's large banks dragging down the whole economy has been delayed until new global banking rules have become clear. In the interim report published in April, the Swiss commission suggested new rules should make it possible to break off parts of a bank that are relevant to the functioning of the wider economy if a bank becomes insolvent.

CURB RATING AGENCIES

Jordan said if countries can reach an agreement on how to handle the failure of a big bank that would be a significant step forward.

"It would be a step forward if the U.S. and other places ... could go forward to find an agreement on the resolution regime," Jordan said, adding that this could avoid having to liquidate a big bank.

Different national solvency and bankruptcy laws make the resolution of cross-border banks difficult.

The FSB is also looking at ways to reduce the influence of credit rating agencies whose opinions determine how much capital banks must set aside to cover risks.

"What we have started to do is a systematic going-through of rules and regulations and where there is dependence on rating agencies, either taking that out or looking for alternatives," Andresen said.

"For the regulatory and supervisory framework, to hardwire the interlinkages between ratings and the regulatory system does not make any sense," Andresen said. (Reporting by Krista Hughes, Sakari Suoninen and Jonathan Gould; writing by Huw Jones; Editing by Ron Askew and Susan Fenton)