UPDATE 2-FSB backs bank surcharge, imposing bondholder loss

Mon Jul 18, 2011 2:46pm EDT

* FSB backs 1.0-2.5 pct surcharge on big banks

* Surcharges must be top-quality capital, no CoCos

* Draft bank resolution framework to make bondholders pay

* FSB to publish recommendations for shadow banks in Oct.

* Some countries will miss 2012 derivatives deadline (Adds FSB comments, adds details on shadow banking sector)

By Daniel Flynn and Leigh Thomas

PARIS, July 18 (Reuters) - The world's top banks will face a surcharge to keep them safe and only top-quality capital can be used, a global regulatory task force said on Monday.

A separate measure to wind up banks without destabilising the broader financial system and sparking the need for more taxpayer bailouts foresees imposing losses on bondholders instead, the Financial Stability Board said.

The FSB, tasked by the world's top 20 economies (G20) to coordinate an overhaul of rules after the financial crisis, said it backed plans released last month by banking supervisors as part of efforts to deal with so-called too big to fail banks.

Chairman Mario Draghi said top banks will be subject to a surcharge band with only top quality capital acceptable -- dashing the hopes of lenders wanting to use lower-quality hybrid debt known as convertible contingent capital, or CoCos.

"Global systemic important banks will be subject to capital surcharges of between 1.0 and 2.5 percent," he told a news conference after chairing an FSB meeting.

The FSB has been tasked by G20 leaders with overhauling financial regulation and the surcharge plans will be put out to public consultation ahead of final endorsement at a G20 summit in November.

"These surcharges will be composed only of common equity," said Draghi, also Bank of Italy governor and due to become European Central Bank president in November.

The surcharge, which will hit banks such as HSBC (HSBA.L), Morgan Stanley (MS.N), Goldman Sachs (GS.N) and Deutsche Bank (DBKGn.DE), would be phased in over three years from 2016, Draghi said.

The surcharge range, composition and timetable remain unchanged from the measure drafted by the global Basel Committee on Banking Supervision in June. [ID:nLDE75O053]

Svein Andresen, FSB secretary general, could not yet say whether the banks facing a surcharge will be named and the question of how frequently they would be reviewed will be discussed in the consultation paper due in the coming days.

The FSB said work continues on identifying systemically important counterparts in the insurance industry.

HAIRCUTS AHEAD

The FSB also approved a separate measure introducing a new global framework of rules and supervisory tool kits to deal with failing banks in a consistent way across borders.

Bank of England Deputy Governor Paul Tucker, also a member of the FSB, told the news conference the new resolution framework foresaw holders of bonds in a bank having to take a loss, or a haircut, if the lender was wound up.

"Equity holders and debt holders are going to take losses and the resolution rules basically apply those losses, those haircuts, in different ways," Tucker said.

"By going into resolution ends up being a haircut. A bail-in is a tool for imposing that haircut ex ante within resolution on the judgement of the resolution authority," he said.

The basic principle is that losses would be allocated in the same order as in liquidation with equity holders first, subordinated debt next, followed by junior through to senior debt.

"There is a discussion paper about whether that ranking which varies a bit across jurisdictions ... should converge across the world," Tucker said.

The framework will also be put out to public consultation ahead of G20 endorsement in November to become a standard against which countries should comply, with monitoring by the FSB and International Monetary Fund, Tucker said.

The tool kit would allow for breaking up banks if necessary into viable and nonviable parts, or "alternatively or in combination with that writing down the value of debt claims after having written off equity so as to recapitalise the firm," Tucker said.

The FSB plans to publish recommendations in October on how to shine a light on the shadow banking sector. Regulators fear that as mainstream banking is more heavily regulated, risky activities will move to less-regulated sectors.

Draghi said the first phase would focus on data sharing followed by assessing the need for extra rules in five areas: bank links to shadow banking entities, money market funds, other entities that carry out banking activities, securitisation and securities lending and repo.

"We're working out a general framework that will focus on these five areas and work on this will obviously carry forward beyond the summit in November," Draghi said.

The G20 set an end of 2012 deadline for members to introduce central clearing, trade reporting and electronic trading in the $600 trillion derivatives market and Draghi said there has been good progress in Europe and the United States.

"At the same time a lot of jurisdictions will likely not complete the implementation of reforms by the end of 2012 which was the deadline set by the G20," Draghi said. (Writing by Huw Jones; Editing by Dan Lalor and Matthew Lewis)

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