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By Michelle Price
HONG KONG, Dec 9 (Reuters) - Asia's financial regulators aredragging their feet on implementing measures to protecttaxpayers from big bank failures, leaving governments on thehook for bail-outs and potentially forcing large global lendersto exit some markets.
After Lehman Brothers collapsed in 2008, G20 countries alongwith Hong Kong, Singapore and Switzerland, pledged to introducenew rules by the end of 2015 that would allow large financialfirms to be wound down without triggering a market meltdown.
However, several Asian nations, including China, India andSouth Korea are making slow progress implementing these reforms,hampering efforts by banks to finalise plans about what theywould do if they went bust, according to lawyers working on theissue.
"There is a lot of reluctance in the Asia region to adoptthese resolution measures full stop, and even where countrieshave something in place, it remains to be seen if they will usethem," said Stephen Schwartz, senior vice president at Moody'sin Hong Kong.
Asia's slow progress is making it tough for policymakersglobally to deliver on a promise to end the "too big to fail"problem - a pledge made by the G20 in the wake of the 2008crisis to ensure taxpayers should not pick up the bill whenlenders collapse.
The region's move to shore-up its banks after the 1997-1998Asian financial crisis and relative comfort with state ownershipare said to be among the reasons holding Asian policymakersback.
One lawyer working on the plans said there was "bemusement"in the financial industry as to why some Asian regulators hadn'tdone more.
In Europe and the United States, by contrast, public angercaused by governments spending more than $1.5 trillion to rescuefirms like American International Group Inc and RoyalBank of Scotland Ltd means regulators have acted quickerto bring in so-called bank "resolution" laws.
LIVING WILLS
Central to the post-crisis reform programme is a requirementfor 39 large financial firms, deemed by regulatory watchdog theFinancial Stability Board to be crucial to the global financialsystem, to draw-up so-called 'living wills' detailing how theycould be allowed to die while maintaining critical functionssuch as ATM payments.
For these plans to work, however, all countries in whichthese banks operate must introduce new laws that allowgovernments to take swift action in the event of a bank failure,such as selling assets or writing down debt.
This means large banks like HSBC, Citigroup and Standard Chartered are reliant on Asian governmentsto overhaul their insolvency regimes, before they can finalisetheir living wills.
Hong Kong, where 38 large global financial firms have apresence, is the most advanced in this complex process. Still,it only expects to table legislation introducing resolutionpowers by the end of next year, the Hong Kong Monetary Authoritysaid in a statement.
India has failed to fully implement even one of nine keyrequirements drawn-up by the FSB on bank resolution, though thegovernment is drafting some proposals. South Korea and Chinahave yet to fully implement six of the nine requirements.
The Reserve Bank of India and Bank of Korea did not respondto requests for comment. The China Banking Regulatory Commissioncould not be reached.
As a result, some large Western lenders, under pressure inthe United States and Europe to complete these plans, may haveto move critical parts of their Asia businesses, such asoutsourcing hubs in India, to other markets.
"The home regulator could force you to move your operationselsewhere," said Royce Miller, head of Asia financial servicesat law firm Freshfields Bruckhaus Deringer in Hong Kong.
One area where many Asian jurisdictions are lagging is thepower to promptly put into effect resolution instructions fromoverseas regulators.
These legal obstacles are beginning to reverberate in NewYork and Europe, home to many of the large banks.
In August, U.S. regulators slammed 11 banks' living wills asinadequate. A person familiar with the discussions said gaps inthe Asia-Pacific plans were partly to blame.
"The plans said 'we'd have no idea what we'd do in thisjurisdiction'," said the lawyer working on the plans.
U.S. regulators and several banks contacted for this articledeclined to comment.
If Asian governments don't speed-up, home regulators mayforce banks to ring-fence overseas assets inside subsidiariesthat are kept separate from the parent company, an expensivestrategy.
In the worst-case-scenario, some Asian countries may becomemarginalised as home regulators impose strict limits on whatbanks can do in those markets or require lenders to sell assetsaltogether.
"The U.S. regulators are saying, if a country doesn't have aworkable resolution regime, you shouldn't be doing businessthere at all," the lawyer said.
(Reporting by Michelle Price; Editing by Lisa Jucca and RachelArmstrong)
