LONDON The world's biggest banks may be able to count surplus capital toward new buffers of special bonds being imposed by regulators, two sources familiar with draft proposals said.
In order to secure a deal the regulators have agreed to a more flexible approach to cater for differences in banking models across the world, both sources said.
The proposed new rule for the world's biggest banks is part of a wider plan for making banks safer after governments had to shore up lenders during the 2007-09 financial crisis.
The new buffers, known as "gone concern loss absorption capacity" or GLAC, are being drafted by the Financial Stability Board (FSB), the regulatory task force of the Group of 20 economies, and at meetings this week there was progress on agreeing core elements for the G20 summit in November to endorse said the sources.
Regulators have now agreed in principle that capital banks hold above minimum global requirements could be counted toward the GLAC figure, the sources said on Thursday.
"The aim is to think of it as one stack rather than separate capital and GLAC," one source said.
This will be seen as a rebuff to U.S. supervisors who wanted the GLAC requirement to be made up of a standalone buffer of only subordinated debt which could not be mixed up with other bank safety cushions.
Eating into the stack would then trigger intervention by regulators to force the lender to bring it back up.
The measure will apply to 29 big banks the FSB has identified and who already have to hold more capital than their smaller peers by 2019.
After the November summit there will be a public consultation on the measure which likely won't propose a single figure for the amount of GLAC banks must hold but instead set a range.
The proposed range is expected to cover either side of 10 percent or equivalent to the core capital buffer the banks typically have already.
Regulators believe that this amount of GLAC would be needed to regain market confidence after a bank has collapsed.
Studies by regulators next year would whittle the range down to a single minimum figure, though some of the 29 banks could have to hold more, the sources said.
There was also progress on how the GLAC requirement will be calculated, with banks being called on to use two methods and comply with the higher figure, the sources said.
The first method, as preferred in Europe, calculates GLAC as a percentage of risk-weighted assets, in the same way a bank's core capital buffer is arrived at.
The second approach, which American supervisors champion, calculates GLAC as a percentage of a bank's total assets in the same way the leverage ratio does.
Core to securing a deal will be safeguards to restore trust between a bank's home and host or overseas supervisors.
Trust between them was lost during the financial crisis when host regulators put pressure on foreign banks to hold capital locally to shield taxpayers, a step that fragmented capital markets.
There would be advance agreements between home and host supervisors on where the GLAC is located - it could be parceled out - and on when the trigger to convert it into equity is pulled, the sources said.
Such agreements could have a knock on effect on bank business models over time but ending "too big to fail" would avert further fragmentation of the global financial system, the sources said
The GLAC plans of each lender would be reviewed by supervisors from outside the lender's home country to build confidence.
The date for full compliance with GLAC is unclear though 2019, the date when other capital requirements come fully into effect, is seen as probably being unrealistic, the sources said.
(Reporting by Huw Jones, editing by Steve Slater and Elaine Hardcastle)