UPDATE 1-G20 bank "living wills" task force needed-IIF

* Bondholders need to face more pain before taxpayer rescue

* Big banks should not be broken up-IIF

* Risk to the system “mutating and unpredictable”

(Adds comments from news conference)

By Steve Slater

LONDON, May 24 (BestGrowthStock) – Leading G20 countries should set
up a task force to oversee the creation of cross-border bank
“living wills” and make bondholders aware they could take more
pain if a lender hits trouble, top bankers said on Monday.

The Institute of International Finance (IIF), a bank lobby
group, said “resolution regimes” laid out for banks should make
it clear that shareholders, bondholders and depositors not
covered by insurance will bear any losses before taxpayers are
called on to bail out a bank.

“Not enough loss was imposed on the capital providers (when
a bank hit trouble), so looking forward we want to make sure the
system is designed with that expectation and those mechanisms in
mind,” said Peter Sands, chief executive of Standard Chartered
(STAN.L: ) and chair of an IIF committee on effective regulation.

The IIF also said big banks should not be broken up by
lawmakers attempting to prevent a repeat of the financial
crisis, as risk to the system was “mutating and unpredictable”
and was not due to the size of banks.

Banks, through the IIF, are getting more vocal in the face
of a raft of regulatory proposals they fear will be
uncoordinated and hit their businesses hard. G20 leaders are due
to meet in Canada at the end of June to discuss reforms.

The IIF, which represents about 390 banks and insurers, said
arrangements for dealing with failing banks need to be
strengthened and clarified as a matter of urgency within an
international framework.

“Failures will occur from time to time and if this is to
happen in an orderly way, the arrangement for resolving failed
firms need to change,” the IIF said in a report.

Resolution regimes, or so-called “living wills”, would
provide details on how a bank would be broken up if it hits
trouble, to prevent problems spreading.

“This would mark a major change and one that would minimise
any burden on taxpayers,” Urs Rohner, vice-chairman for Credit
Suisse (CSGN.VX: ) and IIF director, said at a press conference in
London. The issue involved many of the most “thorny and complex”
issues of the regulation debate, Rohner said.

The G20 has asked all systemically important banks to
develop a living will by the end of this year. Regulators in the
United States, Britain, Spain and elsewhere are in talks with
lenders, but the issues it deals with are likely to take time.

SYSTEMICALLY VITAL

Resolution regimes should give authorities the power to
replace senior management, order a financial restructuring with
instruments such as forced debt-for-equity swaps or a “bail-in”
of unsecured debt holders, and identify parts that remain
systemically vital, such as payment operations, the IIF said.

“There needs to be discipline and consistency in ensuring
that losses are borne by equity and nonequity capital providers,
and by uninsured unsecured creditors,” the report said.

The wills should ensure authorities get powers for early
intervention, it added.

The collapse of U.S. investment bank Lehman Brothers in
September 2008 showed the complexities of winding down a bank
with global assets and liabilities.

The industry should bear costs incurred as part of the
wind-down, and the IIF said a clear majority of its members
preferred a fund that banks paid into after a problem occurs. A
minority would prefer a pre-paid bailout fund.

G20 countries are trying to find consensus over a bank levy
to pay for bailouts, but some countries such as Canada are
opposed. The EU is split over whether to ringfence a levy.

U.S. financial reforms being finalised could force banks to
stop proprietary trading in some cases and spin off their swaps
desks to shield depositors from risky activities.

But the IIF urged regulators not to break up banks, saying
systemic risk is different from other risks and is due to
interconnectedness, rather than a bank’s size.

Banks say they have improved capital levels and strengthened
risk management, but say there are flaws in proposals to
strengthen capital and liquidity arrangements and want lawmakers
to coordinate regulatory proposals. [ID:nLDE64H2G4]

Investing Analysis

(Editing by David Holmes and David Cowell)

UPDATE 1-G20 bank “living wills” task force needed-IIF