Bank of England hints at size of new bond buffer for big banks

* UK banking watchdog indicates size of new bond buffer

* BoE to consult on implementing new EU bank law

By Huw Jones

LONDON, July 24 (Reuters) - Britain's biggest banks, such asBarclays and HSBC, will need to build up abuffer of loss-absorbing bonds at least as big as the capitalthey already hold to cushion against shocks, according to asenior Bank of England official.

These bonds could be used if a bank went bust to providecash to help keep key parts of the bank afloat while it isrestructured.

The so-called "bail-inable" bonds are part of plans bypolicymakers around the world to prevent taxpayers having to payfor rescues of banks deemed "too big to fail" as happened duringthe 2007-2008 financial crisis.

Andrew Gracie, executive director of resolution at the Bankof England, Britain's main banking watchdog, gave an earlyindication of how much banks would need in a speech last weekbut only made available on Thursday.

Gracie said the buffer must be, at a very minimum,sufficient to restore the lender's basic capital requirement.

Under new global capital rules, banks have to hold capitalequivalent to 7 percent of their risk-weighted assets.

He said an even bigger amount of bonds might be needed atthe largest banks to ensure the restructured bank issustainable.

"For a bank that has undergone resolution to command marketconfidence, it is likely to need at least as much capital asother banks in the market," Gracie said.

Most major banks now have a basic capital buffer of about 10percent or above to reassure investors about their financialhealth.

Gracie's words carry clout as under a new European Unionbank resolution law, that comes in from next year, nationalsupervisors, such as the Bank of England, will have the power totell banks how many bail-in bonds they need.

The EU law sets out the powers and processes needed to winddown stricken banks. The Bank of England on Thursday began apublic consultation on implementing the law. It is not yetdecided what type of bonds will qualify as "bail-in" debt.

At the global level, leaders of the Group of 20 economies(G20) will meet in November and hope to reach a deal on how biga cushion of bail-in debt the world's top 29 banks must hold.

But the global regime on bail-in bonds will not be legallybinding, unlike the EU law which will make these bonds arequirement for banks that national supervisors decide are bigenough to need them.

Britain's Barclays, HSBC and RBS come under thescope of both the global and EU bail-in rules. (Reporting by Huw Jones. Editing by Jane Merriman)