* BoE says still work to do on "too big to fail" banks
* BoE to hold public consultation on leverage ratio
(Adds more detail, background)
By Huw Jones
LONDON, May 13 Britain's banks need to start
preparing for a financial environment in which they are no
longer "too big to fail", Bank of England Deputy Governor Jon
Cunliffe said on Tuesday.
Taxpayers in Britain poured 65 billion pounds into banks
during the 2007-09 financial crisis and the BoE wants to ensure
that no bank is so big that letting it fail would risk the
market mayhem seen when Lehman Brothers went bust in September
Speaking at an event held by Barclays bank,
Cunliffe cautioned lenders that once new rules are in place to
ensure that no bank is too big to fail, market liquidity won't
return to levels seen in the run-up to the financial crisis.
"Liquidity premia were likely too low and liquidity risk
very probably under-priced before the crisis," Cunliffe said.
"Market participants will need to recognise this change in
market structure and adjust their balance sheets accordingly,"
One of the rules being finalised is a requirement to hold a
buffer of bonds that can be used to shore up a failing bank once
it has burned through all its regulatory capital.
But Cunliffe said the aim won't be to resurrect every failed
business such as by arranging "hasty shotgun weddings" or forced
The amount of "bail-in" bonds that banks will be required to
hold will only be enough to keep critical operations such as
payment systems going to avoid harming financial stability,
while the group can be safely wound down over time.
"We are not seeking an amount of 'Gone Concern
Loss-Absorbing Capacity' capable of resurrecting any failing
banks including the global giants," Cunliffe said.
Cunliffe's boss, Bank of England Governor Mark Carney, who
is also chairman of the G20 economies' Financial Stability
Board, said in March that the board wants to crack "too big to
fail" bank barriers by Christmas.
Another global rule being finalised is the leverage ratio,
which acts as a cap on a bank's balance sheet.
A preliminary ratio of 3 percent was set and global
regulators will decide in 2017 what the final minimum level
should be, though countries like the United States are already
moving to a much higher requirement.
Some bankers expect Britain's lenders will be required to
have a leverage ratio of 4 percent or above regardless of what's
decided at the global level.
The government has asked the BoE's Financial Policy
Committee to review if the global leverage rule should be
introduced earlier in Britain.
Cunliffe said the Bank will hold a public consultation on
this and on a possible new power to vary a bank's leverage
Regulators are putting pressure on the swaps industry to
revise trillions of dollars of contracts by inserting a clause
that allows for such contracts being temporarily prevented from
being closed out while a bank is being wound down.
The industry says that big investors or "buy side" players
have legal difficulties with this. But Cunliffe signalled that
regulators won't be deterred.
"The way forward will likely entail the major dealers, the
'sell side', who together account for around 80 percent of
contracts in the market, moving first," Cunliffe said.
Ensuring that no lender is 'too big to fail' is not only
seen as crucial to shielding taxpayers but also to restoring
trust among regulators after the collapse of Lehman Brothers
soured relations, leading to unilateral national measures on
capital rather than global coordination.
(Reporting by Huw Jones; Editing by Jemima Kelly and Hugh