July 24, 2014 / 1:40 PM / in 4 years

Bank of England hints at size of new bond buffer for big banks

* UK banking watchdog indicates size of new bond buffer

* BoE to consult on implementing new EU bank law

By Huw Jones

LONDON, July 24 (Reuters) - Britain’s biggest banks, such as Barclays and HSBC, will need to build up a buffer of loss-absorbing bonds at least as big as the capital they already hold to cushion against shocks, according to a senior Bank of England official.

These bonds could be used if a bank went bust to provide cash to help keep key parts of the bank afloat while it is restructured.

The so-called “bail-inable” bonds are part of plans by policymakers around the world to prevent taxpayers having to pay for rescues of banks deemed “too big to fail” as happened during the 2007-2008 financial crisis.

Andrew Gracie, executive director of resolution at the Bank of England, Britain’s main banking watchdog, gave an early indication of how much banks would need in a speech last week but only made available on Thursday.

Gracie said the buffer must be, at a very minimum, sufficient to restore the lender’s basic capital requirement.

Under new global capital rules, banks have to hold capital equivalent to 7 percent of their risk-weighted assets.

He said an even bigger amount of bonds might be needed at the largest banks to ensure the restructured bank is sustainable.

“For a bank that has undergone resolution to command market confidence, it is likely to need at least as much capital as other banks in the market,” Gracie said.

Most major banks now have a basic capital buffer of about 10 percent or above to reassure investors about their financial health.

Gracie’s words carry clout as under a new European Union bank resolution law, that comes in from next year, national supervisors, such as the Bank of England, will have the power to tell banks how many bail-in bonds they need.

The EU law sets out the powers and processes needed to wind down stricken banks. The Bank of England on Thursday began a public consultation on implementing the law. It is not yet decided what type of bonds will qualify as “bail-in” debt.

At the global level, leaders of the Group of 20 economies (G20) will meet in November and hope to reach a deal on how big a cushion of bail-in debt the world’s top 29 banks must hold.

But the global regime on bail-in bonds will not be legally binding, unlike the EU law which will make these bonds a requirement for banks that national supervisors decide are big enough to need them.

Britain’s Barclays, HSBC and RBS come under the scope of both the global and EU bail-in rules. (Reporting by Huw Jones. Editing by Jane Merriman)

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