Banks seek flexibility in last major post-financial crisis regulation

By Laura Noonan and Douwe Miedema

LONDON/WASHINGTON, Oct 3 (Reuters) - The world's largest banks are pushing regulators for more flexibility in the last major set of rules to come out of the global financial crisis: requirements that would double the capital cushion banks are forced to hold.

Leaders of the 20 most important economies, the G20, in November will issue a draft rule, which many of the biggest banks say need to be tailored to each institution.

The rules are the final set being considered by the nations in the wake of the crisis, after raising requirements for shareholder equity and requiring banks show how they can be wound down without government money.

Banks are divided - amongst themselves and with regulators - on how the measures should be applied to each bank, with debates over the right level of capital, whether riskier banks should hold more of it, and how the capital must be distributed through the company's units across the world.

Unusually, though, they largely agree with the point of the new rules, raising their ability to absorb losses.

The plan, known as Total Loss-Absorbing Capacity (TLAC), is "a logical next step and a good next step," said Adrian Docherty, global head of financial institutions advisory at BNP (Paris: FR0000131104 - news) Paribas.

But he said there could be unintended consequences and that flexibility was key.

For instance, European banks want to avoid having to set up a holding company structure to make them look more like U.S banks, something they say could be a costly exercise.

"The need for (holding company) structures may be fine in certain countries and for certain banks but is causing headaches elsewhere," he said.

Regulators in each country will implement the plan, which will double the amount of capital that would not be repaid in a crisis by earmarking some bonds for losses. Contracts for such bonds could make clear that the money is gone when certain triggers are hit, for instance.

The Federal Reserve, which will make U.S. rules, declined to comment. Countries can draw up rules that are tougher than the global agreement, with the Fed in particular seen as one of the most hawkish regulators.

Regulators have made some concessions to banks since the beginning of the year, one banking source said. For instance, they have agreed to allow more flexibility in how the TLAC capital is counted.

Banks may succeed in fine-tuning the plan further, but the basic principles probably will not change, said one lawyer who works with banks on such regulatory issues.

"I don't think it's going to change a lot in the fundamentals," the lawyer said.

The rules will be levied on the world's 29 most systemically important banks, including Wall Street giants like JP Morgan Chase and Goldman Sachs (NYSE: GS-PB - news) , European banks such as HSBC, Credit Suisse (NYSE: CS - news) and Santander, and Asian lenders like Mitsubishi UFJ FG.

Research from Citi shows the European banks best prepared include Nordea, UBS (NYSEArca: FBGX - news) , Societe Generale (Paris: FR0000130809 - news) and Credit Suisse, while BBVA, Santander, Standard Chartered and HSBC lagged.

U.S. banks are reasonably well positioned, even if a handful would still need to do some repair work, a Reuters analysis showed in June.

CALIBRATION CONCERNS

Several European bankers, who declined to be named, said that living wills - plans banks had to submit to show how they can be wound down during a crisis without taxpayer support - should serve as the basis to draw up individual capital plans.

Gilbey Strub, at the Association for Financial Markets in Europe (AFME), an industry group, said differences in regimes to wind down banks across Europe should be reflected in what capital buffers are imposed on banks.

Underlying the debate are different views among countries and banks on what TLAC should do: allow a complete resurrection of a bank that has failed, or just prop up those units of a bank that are crucial to the stability of the entire system.

A senior executive at one of Europe's biggest banks said the rules were a "very good idea" conceptually but should not be applied so that "one-size-fits-all".

The European banker cited the case of a bank with a retail unit, which needed to be protected, and specialized divisions which, while needing a lot of capital, did not. The latter could be left out of the TLAC calculation, he said. (Reporting by Laura Noonan in London and Douwe Miedema in Washington, editing by Peter Henderson)