UPDATE 1-Regulators seek to ease bank failure blow for taxpayers

* All capital but ordinary shares would carry new clause

* Clause would allow for write-offs before state rescue

* Plan a step towards solving too-big-to-fail issue

(Recasts with details from proposal)

By Lisa Jucca

ZURICH, Aug 19 (BestGrowthStock) – Investors other than ordinary
shareholders would take a loss before banks are bailed out by
taxpayers or fail under a new proposal from the Basel Committee
of global banking regulators.

The proposal, unveiled on Thursday, is part of wide-ranging
measures regulators have been planning to reshape the financial
system and avoid a repeat of the credit crisis that forced
governments to inject hundreds of billions of dollars to shore
up ailing lenders.

Under the proposal all capital instruments other than common
stocks would could be written-off or converted if a bank is
about to be rescued by the state or about to fail, effectively
hitting capital providers — such as holders of bonds and
preferred shares — before ordinary citizens.

The proposed new clause triggering the write-offs would be
activated at the request of the regulator based in the relevant

The Basel Committee “believes that a public sector injection
of capital needed to avoid the failure of a bank should not
protect investors in regulatory capital instruments from
absorbing the loss that they would have incurred had the public
sector not chosen to rescue the bank,” it said in its proposal.

The plan stems from the realisation that when governments
stepped in to shore up lenders during the credit crisis, they
bailed out both the bank and the capital providers.

“As a precondition for being treated as regulatory capital,
an instrument must be capable of bearing a loss if the issuing
bank is unable to support itself in the private market,” said
Nout Wellink, chairman of the Basel Committee and head of the
Dutch central bank.

Banks ranging from Britain’s Royal Bank of Scotland (RBS.KA: )
and Lloyds (LLOY.L: ) to ABN AMRO and Fortis in the Netherlands to
Switzerland’s UBS (UBSN.VX: )(UBS.N: ) took government cash or were
partly nationalised at the peak of the crisis.

The Basel Committee proposal goes a step further in trying
to address the too-big-to fail problem, which is still under
discussion in international regulatory circles.

The proposal, which would require changes in contractual
law, is open for consultation until Oct 1.

(Editing by Toby Chopra)

UPDATE 1-Regulators seek to ease bank failure blow for taxpayers