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* FSB's Carney: Tackling too big to fail banks is"outstanding priority"
* G20 to debate mandatory extra loss absorption at big banks
By Huw Jones
LONDON, Sept 2 (Reuters) - The world's banking system risksfragmentation that could hurt growth if countries cannot settletheir differences over how to handle big banks that run intotrouble, a top policymaker said on Monday.
Mark Carney, chairman of the Financial Stability Board(FSB), is due to report to leaders of the G20 group of economiesthis week on the slow progress so far in tackling the last ofthe big post-crisis reforms: making sure banks are not too bigto fail.
The United States and Europe have clashed on their differentpreferences for how to avoid future taxpayer bank bailouts.
Carney, without referring to individual countries, said hewould stress the need for the G20 to cooperate.
"The fragmentation of the international financial systemthat results from such nationally focused policies could reduceglobal growth by putting up barriers to the efficient allocationof capital and liquidity," Carney told a news conference.
Taxpayers had to shore up lenders in Britain, the UnitedStates and elsewhere during the 2007-09 crisis because there wasno fail-safe way of winding them down without the market mayhemseen after Lehman Brothers was allowed to fail in September2008.
Carney, who is also Bank of England governor, will updateG20 leaders at a summit in Russia on Thursday and Friday,setting a 2014 deadline for finalising the changes needed.
"A core message from the FSB to the summit is that what theG20 does ultimately determines the openness of not just theglobal financial system but the global trading system," he said.
Bankers say privately that solving too-big-to-fail will behard but that success would make other post-crisis reformsalmost irrelevant as lenders would not act recklessly again inthe knowledge there will be no more public rescues.
The slow progress has prompted some countries to takeunilateral measures as trust among supervisors over banks isstill not strong enough.
The European Union is annoyed with U.S. plans to imposeheavier capital requirements on foreign banks as a safeguard tokeep its taxpayers off the hook if they get into trouble.
Britain has also been criticised for putting pressure onforeign banks to become fully fledged subsidiaries and thusrequired to hold a pot of capital and cash locally.
Carney said nationally focused policies could reduce globalgrowth by hindering efficient allocation of capital andliquidity.
"Reforms that strengthen the resilience of the national andglobal system can also prevent regulatory arbitrage, reducecontagion and reduce incentives to ring-fence national systems,"Carney said.
The G20 has already agreed that 28 of the biggest banks inthe world, including Goldman Sachs, HSBC andDeutsche Bank, must hold more capital than theirsmaller, more domestically focused peers from 2016.
The G20 will now debate if the biggest banks should also berequired to have a minimum amount of so-called loss absorptioncapacity like bonds that could be tapped if they fail.
Carney said most of the big banks could hold that cushion atthe group level but critics say this will raise issues of trustin other countries where the bank has branches.
He will try to persuade leaders to allow their regulators tosign agreements with counterparts in other countries so thatwhen a bank is in trouble, there is a clear blueprint on how itwill be handled to avoid uncertainty and taxpayer exposure.
The FSB will prepare proposals for consideration by the endof 2014 on the nature, amount, location within the groupstructure and possible disclosure of loss-absorbing capacity.
Carney said developing a mindset of cooperation amongsupervisors was crucial: "This is new territory. The work on toobig to fail brings that to the fore in many respects."
