* G20 summit in November to study draft "bail in" rule
* Bankers expect new debt buffer of about 10 percent
By Huw Jones
LONDON, May 16 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
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
"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
We want there to be sufficient capital to recapitalise 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 recapitalise, so the era of too big to fail is probably
over," Bodereau said.
(Reporting by Huw Jones. Editing by Jane Merriman)