Last checked at 
* Governments want to avoid having to bail out banks again
* Lenders will have to issue "bail-in" bonds
* Rules also being written on closing failed banks
* But regulators fear inconsistencies in rules
* Euro zone rules may differ from other EU states, U.S.
By Huw Jones
LONDON, May 17 (Reuters) - Regulators are worried thatpatchy application in Europe and beyond of new rules to solvethe problem of banks that are "too big to fail" could make itharder to avoid a repeat of the mayhem that followed thecollapse of Lehman Brothers.
They point to likely inconsistencies in how banks will betreated under the rules that are being written, not only betweenEuropean authorities in and outside the euro zone but also injurisdictions further afield such as the United States.
Even if these problems can be overcome, regulators also fearclearing houses that will increasingly handle deals in the $630trillion financial derivatives and swaps market could become anew generation of too-big-to-fail institutions.
The demise of Lehman Brothers investment bank in 2008 helpedto accelerate the global crisis. Governments were forced to bailout a series of banks in the United States and Europe at hugecost to taxpayers, fearing that if such big lenders failed, theywould drag the entire financial system down with them.
Policymakers around the world are now forcing banks to buildup safety cushions that are big enough that they could ride outa future crisis, or could be allowed to fail without fear ofsetting off a systemic meltdown.
The policymakers are putting their faith in two measures.
New "resolution" mechanisms are being introduced for therestructuring or orderly winding down of a collapsing bank sothat vital parts of its business, such as customer accounts andpayments, could continue operating.
Banks are also being forced to sell "bail-in" bonds toinvestors. Holders of the bonds agree to bear losses if thebank's core capital falls to a dangerously low level during acrisis. Investors might alternatively have their bonds convertedinto shares in the bank, but the public should not be called onto fund a rescue, as in the past.
Under an initiative of the Group of 20 leading industrialand developing economies, the world's top 30 lenders - many ofthem European such as Deutsche Bank and HSBC - must issuebail-in bonds. But rules being created by national andpan-national regulators to cover a wider range of banks maydiffer.
Isabelle Vaillant, director of regulation at the EU'sEuropean Banking Authority (EBA), is concerned that a patchworkof requirements for the quantity of bail-in bonds or differingsystems for the resolution of banks will emerge within Europeand globally.
"The level is something which may bring inconsistenciesbecause at the global level it will be one figure, and here inEurope it's case-by-case," she said. "I am afraid that what wehave is still not workable in practice cross-border beyondEurope, and even within Europe."
With big lenders operating across many jurisdictions, thepotential for crossed wires between different authorities is aconcern, especially given the bitter lessons of the Lehman crashwhich left trust among regulators in tatters.
In the euro zone, the newly-launched Single Resolution Board(SRB) will decide on the quantity of bail-in bonds that the top150 banks based in the currency bloc must issue. But elsewherein the European Union, such as in Britain, national watchdogswill set the rules. The same goes for decisions on whether toclose down a bank.
Complicating matters, many banks straddle European countriesin and outside the euro zone and also have major business well beyond EU borders.
Elke Koenig, who chairs the SRB, does not expect a patchworkapproach inside the euro zone, but agreed there were many issueson the "to-do list" when it comes to cross-border elements. "Ifwe issue a resolution decision, well then it's not immediatelyrecognised in the U.S. or in Asia," Koenig said.
SUBSTANTIALLY SOLVED
Nevertheless, regulators and bankers say the measures add upto progress in tackling the too-big-to-fail issue.
"It has substantially solved the problem," Douglas Flint,chairman of HSBC, told the Reuters Financial Regulation Summitin the past week.
However, "nuances" on regulatory cooperation and bankruptcycodes around the world would take some time to solve, he said,adding that there would be geographical differences partly dueto cultural and social attitudes to bail-ins.
John Ho, head of wholesale banking legal at StandardChartered Bank in Singapore, said more work is needed when itcomes to winding down international lenders in particular. "Oneof the challenges to look at is when a bank operates on across-border level, what rules apply," Ho said.
Koenig, a former head of German regulator Bafin, wassceptical that the too-big-to-fail problem can be eradicated."You can never declare victory and say 'I have solved thatproblem for ever', but I would say we have gone a very longway," she said.
CLEARERS NEXT?
Derivatives such as credit default swaps played a role inthe chaos caused by Lehman's demise. Regulators have called forsuch transactions to be cleared as well - rather than simplyprivately traded between buyers and sellers, as is often thecase now - to increase the markets' transparency and safety.
This means clearing volumes will grow sharply in the comingyears.
Greg Medcraft, chairman of the International Organization ofSecurities Commissions (IOSCO), a global umbrella body formarket regulators, said the levels of capital held by clearinghouses were now undergoing stress-tests. These exercises to seehow well the clearing houses could withstand a crisis aimed toensure that a failure wouldn't cause chaos across the market.
"In a stress scenario what happens? Is there a need for anadditional layer of capital? That is still up for debate,"Medcraft said.
The EU will publish a draft law later this year onresolution planning at clearing houses, raising the question ofwhether a body like the SRB is needed in Europe for clearers.
"There is clearly a huge interlink between banks andclearing houses," Koenig said, adding that it would not be"totally unreasonable" for the SRB to extend its remit toclearing houses. (Additional reporting by Michelle Price in Hong Kong; editingby David Stamp)
