G20 plans for 'too big to fail' banks

The Group of 20 leading economies (G20) meets in Seoul next month to agree a package of measures targeted at "too big to fail" banks.

The aim is to ensure that if any of the world's 30 or so "systemically important" lenders get into trouble, they can be dealt with quickly, at no cost to the taxpayer and without disrupting the broader financial system as well.

It is part of the G20's wider efforts to learn from the financial crisis that forced governments to stump up trillions of dollars to shore up banks.

Who is drafting these measure

The G20 has tasked the Financial Stability Board (FSB), made up of central bankers, regulators and treasury officials from its member countries, to draft the package.

The FSB meets in South Korea next week to finalise it.

Last year the FSB published an interim report on reducing the moral hazard posed by systemically important financial institutions or SIFIs in G20 jargon.

It outlines steps G20 countries could take within a "constrained discretion" framework, meaning a member country would have to show it was implementing enough measures listed to achieve the overall outcome for any SIFIs on its patch.

The Basel Committee of supervisors and central bankers from G20 countries agreed last month that SIFIs must hold additional "loss absorbing capacity" above new minimum global capital requirements known as Basel III being introduced from 2013.

What couild the package include

So far the FSB, regulators and policymakers have indicated several measures are likely:

capital surcharge: one idea is to force big banks to hold a capital buffer on top of Basel III.

contingent capital or CoCos, a bond that converts into equity when an agreed trigger point is hit as a bank gets into trouble.

creditor bail-ins: a bank's creditors agree in advance to have a restructuring imposed on them if the firm hits the skids so that the bonds they hold turn into equity.

more intensive supervision of bigger banks and more consistent supervision among different regulators.

resolution and "living wills": each country would be required to set up a mechanism for winding down collapsing banks efficiently to minimise disruption and uncertainty.

structural changes: if resolution mechanisms or living wills won't work because a bank is too complicated then structural changes should be considered.

Is a deal expected?

Yes and no.

G20 leaders will likely give general endorsement to the FSB package but say more work is needed to flesh them out -- a way of masking fundamental disagreements over some sections.

Countries are expected to select from the "menu" in the package but no item would be mandatory for everyone. This will be described as tailoring to an individual countries situation.

This is because some countries like Britain, the United States and Switzerland are sympathetic to a mandatory capital surcharge but Germany, France and Japan are against this.

A meeting of the Basel Committee, which would flesh out a surcharge to fit in with Basel III, failed to reach a consensus on this last month. Without everyone introducing a surcharge, some banks would end up disadvantaged.

Regarding CoCos, some countries like Switzerland and Britain are more sympathetic to their use but German and Spanish regulatory officials doubt how well they would work in a crisis.

There are also doubts if investors have an appetite for such hybrid debt and there is also debate over exactly when would the conversion to equity take place.

Structural remedies are also controversial. The United States has approved a Volcker Rule that requires some types of banks to spin off proprietary trading desks and hedge fund operations so that deposits are not at risk. European Union countries have opposed such a rule.

There is also disagreement over how banks should be wound up with US plans allowing parts of a failing bank to continue operating meeting with scepticism in Europe. Some regulators also say it may take many years to reach a foolproof way that can resolve cross-border banks, which are typically SIFIs.