* Governments want to avoid having to bail out banks again
* Lenders will have to issue "bail-in" bonds
* Rules also being written on closing failed banks
* But regulators fear inconsistencies in rules
* Euro zone rules may differ from other EU states, U.S.
By Huw Jones
LONDON, May 17 (Reuters) - Regulators are worried that patchy application in Europe and beyond of new rules to solve the problem of banks that are "too big to fail" could make it harder to avoid a repeat of the mayhem that followed the collapse of Lehman Brothers.
They point to likely inconsistencies in how banks will be treated under the rules that are being written, not only between European authorities in and outside the euro zone but also in jurisdictions further afield such as the United States.
Even if these problems can be overcome, regulators also fear clearing houses that will increasingly handle deals in the $630 trillion financial derivatives and swaps market could become a new generation of too-big-to-fail institutions.
The demise of Lehman Brothers investment bank in 2008 helped to accelerate the global crisis. Governments were forced to bail out a series of banks in the United States and Europe at huge cost to taxpayers, fearing that if such big lenders failed, they would drag the entire financial system down with them.
Policymakers around the world are now forcing banks to build up safety cushions that are big enough that they could ride out a future crisis, or could be allowed to fail without fear of setting off a systemic meltdown.
The policymakers are putting their faith in two measures.
New (KOSDAQ: 160550.KQ - news) "resolution" mechanisms are being introduced for the restructuring or orderly winding down of a collapsing bank so that vital parts of its business, such as customer accounts and payments, could continue operating.
Banks are also being forced to sell "bail-in" bonds to investors. Holders of the bonds agree to bear losses if the bank's core capital falls to a dangerously low level during a crisis. Investors might alternatively have their bonds converted into shares in the bank, but the public should not be called on to fund a rescue, as in the past.
Under an initiative of the Group of 20 leading industrial and developing economies, the world's top 30 lenders - many of them European such as Deutsche Bank (Xetra: 514000 - news) and HSBC - must issue bail-in bonds. But rules being created by national and pan-national regulators to cover a wider range of banks may differ.
Isabelle Vaillant, director of regulation at the EU's European Banking Authority (EBA), is concerned that a patchwork of requirements for the quantity of bail-in bonds or differing systems for the resolution of banks will emerge within Europe and globally.
"The level is something which may bring inconsistencies because at the global level it will be one figure, and here in Europe it's case-by-case," she said. "I am afraid that what we have is still not workable in practice cross-border beyond Europe, and even within Europe."
With big lenders operating across many jurisdictions, the potential for crossed wires between different authorities is a concern, especially given the bitter lessons of the Lehman crash which left trust among regulators in tatters.
In the euro zone, the newly-launched Single Resolution Board (SRB) will decide on the quantity of bail-in bonds that the top 150 banks based in the currency bloc must issue. But elsewhere in the European Union, such as in Britain, national watchdogs will set the rules. The same goes for decisions on whether to close down a bank.
Complicating matters, many banks straddle European countries in and outside the euro zone and also have major business well beyond EU borders.
Elke Koenig, who chairs the SRB, does not expect a patchwork approach inside the euro zone, but agreed there were many issues on the "to-do list" when it comes to cross-border elements. "If we issue a resolution decision, well then it's not immediately recognised in the U.S. or in Asia," Koenig said.
Nevertheless, regulators and bankers say the measures add up to progress in tackling the too-big-to-fail issue.
"It has substantially solved the problem," Douglas Flint, chairman of HSBC, told the Reuters Financial Regulation Summit in the past week.
However, "nuances" on regulatory cooperation and bankruptcy codes around the world would take some time to solve, he said, adding that there would be geographical differences partly due to cultural and social attitudes to bail-ins.
John Ho, head of wholesale banking legal at Standard Chartered Bank in Singapore, said more work is needed when it comes to winding down international lenders in particular. "One of the challenges to look at is when a bank operates on a cross-border level, what rules apply," Ho said.
Koenig, a former head of German regulator Bafin, was sceptical that the too-big-to-fail problem can be eradicated. "You can never declare victory and say 'I have solved that problem for ever', but I would say we have gone a very long way," she said.
Derivatives such as credit default swaps played a role in the chaos caused by Lehman's demise. Regulators have called for such transactions to be cleared as well - rather than simply privately traded between buyers and sellers, as is often the case now - to increase the markets' transparency and safety.
This means clearing volumes will grow sharply in the coming years.
Greg Medcraft, chairman of the International Organization of Securities Commissions (IOSCO), a global umbrella body for market regulators, said the levels of capital held by clearing houses were now undergoing stress-tests. These exercises to see how well the clearing houses could withstand a crisis aimed to ensure that a failure wouldn't cause chaos across the market.
"In a stress scenario what happens? Is there a need for an additional layer of capital? That is still up for debate," Medcraft said.
The EU will publish a draft law later this year on resolution planning at clearing houses, raising the question of whether a body like the SRB is needed in Europe for clearers.
"There is clearly a huge interlink between banks and clearing houses," Koenig said, adding that it would not be "totally unreasonable" for the SRB to extend its remit to clearing houses. (Additional reporting by Michelle Price in Hong Kong; editing by David Stamp)