Basel body agrees framework on capital wipeouts

LONDON (Reuters) - The Basel Committee on global regulators and central bankers agreed on Wednesday that some forms of capital must be wiped out when a bank fails so that taxpayers don't pick up the tab in the next crisis.

Policymakers across the world want to ensure a broader range of stakeholders in banks, such as owners of preference shares and subordinated debt, take a hit when the firm collapses.

Owners of such capital held by a bank were shielded from losses by injections of state aid during the financial crisis. The aim is to allow a bank to fail without the global disruption seen when Lehman Brothers went under in 2008.

"Taking account of comments received during a recent public consultation, the committee agreed on key elements of the proposal to ensure the loss absorbency of regulatory capital at the point of non-viability and will elaborate the rules concerning transitional arrangements and grandfathering," the Basel Committee said in a statement.

Work continues on when hybrid debt should convert into equity at a bank whose capital levels are falling.

"It is also assessing the extent of going-concern loss absorbency that could be provided by different instruments. This review will be completed by mid-2011," the committee added.

The committee agreed a detailed text for Basel III, its new tougher bank capital and liquidity standards that the Group of 20 (G20) leading countries endorsed this month.

The G20 also said the biggest banks must have loss-absorption capacity above Basel III levels.

The Basel committee said it has now agreed on a range of indicators to determine which banks must hold this extra capacity to withstand market shocks without state aid.

"The committee will complete by mid-2011 a study of the magnitude of additional loss absorbency that global, systemically important banks should have," it said.

"It is also assessing the extent of going-concern loss absorbency that could be provided by different instruments."

The G20 has effectively given the green light to banks using hybrid debt as part of their regulatory capital as long as it converts into equity when capital levels become low.

CLEARING HOUSE CAPITAL

Paul Tucker, deputy governor of the Bank of England, said on Wednesday he expected each G20 country to require extra loss absorption capacity at "too big to fail" banks on their turf.

"All of the countries have signed up to that," Tucker told a Reform think tank conference in London.

France and Germany argue their big banks should not have to be saddled with capital surcharges but Tucker said extra loss absorption capacity in this form was "just one variant."

G20 leaders had hoped to approve a fleshed out package this month but the dispute over surcharges and which banks will come under the "too big to fail" net means the work will continue well into 2011 as Tucker acknowledged.

"Is any of this going to happen the day after tomorrow? No," said Tucker, who also represents Britain on the Financial Stability Board, the G20's regulatory task force.

"Sometimes really firm things have to be introduced in gradual steps. There is a determination behind this and it's across the world. This isn't a UK thing," Tucker said.

The Basel Committee also agreed on tougher rules for requiring banks to set aside capital to cover their exposures to default funds at central counterparties.

This follows a G20 decision to require central clearing of large chunks of the $615 trillion off-exchange derivatives market to cut risk and improve transparency.

A draft proposal will be published by the end of the year and the committee will also conduct an impact study with the goal of finalising the rules in 2011.

It will also study the impact of the committee's planned rules on trade finance "in the context of low income countries."