The bonds, known as "gone concern loss absorption capacity" or GLAC,
are seen by regulators as essential to stopping the world's 29
biggest lenders from being "too big to fail".
The plans are being drafted by the Financial Stability Board, the
regulatory task force of the Group of 20 economies which declined to
comment ahead of a G20 summit in November, when G20 leaders will
discuss the reform before it is put out to public consultation.
The reform would put in place the final major piece of G20
regulation on banking as the global body turns to a "post-crisis"
agenda of fostering economic growth and bedding down the rules it
There had been unease in Asia and parts of Europe over how big the
bond issues need to be to provide this cushion but there is now a
new optimism amongst bankers and regulators that the G20 will reach
a deal in November.
"The industry is definitely in favor of making resolution, supported
by an appropriately flexible concept of GLAC, work. That is the key
pending aspect on ending too-big-to-fail," said Andres Portilla,
director of regulatory affairs at the Institute of International
Finance, a Washington-based banking and insurance lobby.
"What is likely to happen is that there will be a consultative
proposal, but without all the detail that a lot of people would
like," Portilla added.
However, a G20 source said a deal was not only expected but would
also be more detailed than some parties anticipate, which is
essential for conducting a thorough impact assessment before
finalizing the rules.
"The authorities and the FSB are working to have a proposal that
will contain sufficient granularity of numbers to be a meaningful
consultation and quantitative impact study to calibrate the final
rule," the source said.
Top banks expect they will have to hold GLAC bond capital equivalent
to about 10 percent of their risk-weighted assets on top of their
core capital buffers which currently stand at around 10 percent. But
they hope for some leeway if they can show that they can already be
wound down smoothly in a crisis because of simplified structures.
The G20 source poured cold water on this, saying regulators believe
all the world's top 29 banks earmarked for tougher supervision will
need a significant cushion of such so-called "bail-in" bonds for
some time to show they can be shut without public aid.
Regulators ultimately want to price bank debt better and end the
cheaper funding that too-big-to-fail banks enjoy because markets
assume governments would never allow them to collapse.
[to top of second column]
END OF HEAVY LIFTING
Efforts by the authorities so far are having an impact.
"We have been lowering our systemic support assumptions for banks or
changing their outlooks to 'negative' to reflect the ongoing effort
by governments to try to eliminate that support," said Johannes
Wassenberg, managing director of banking at Moody’s credit rating
agency in Europe.
In May, Moody's lowered its outlook to 'negative' on more than 80
banks in the European Union after the bloc approved a law requiring
banks to hold a buffer of potential bail-in debt like GLAC.
"Adopting GLAC is the final chapter in reforming the condition of
banks," said Thomas Huertas, a former UK banks supervisor and now a
regulatory consultant with EY.
The plans for bail-in bonds are among the last of what G20 officials
call the "heavy lifting" on banking industry reforms that came in
the aftermath of the financial crisis.
With much of the work on defining how to make banking safer
completed, the G20's focus will shift to implementation of its rules
and behavior at banks after lenders were fined for rigging the Libor
interest rate benchmark, with similar allegations in the currency
markets now emerging.
"After dealing with too big to fail, the next big section for the
G20 is conduct and there will be a shift in attention to that
issue," Huertas said.
(Editing by Greg Mahlich)
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