EU unlikely to extend global bail-in rules beyond big banks -official

* Medium-sized banks to remain exempt from TLAC requirements

* Commission's new line meets German and British requests

* Berlin and London oppose French-Italian proposal for MRELcaps

* EU Commission's position between caps and floors for MREL

By Francesco Guarascio

BRUSSELS, June 8 (Reuters) - The European Commission isunlikely to extend global rules on how failed banks absorblosses to European lenders below the top tier of internationalinstitutions, a Commission official told Reuters on Wednesday.

Such a decision would find favour with Germany and Britain,which have urged the EU executive not to extend the so-calledTLAC requirement beyond the very biggest banks.

Under global rules set by the Basel-based FinancialStability Board, the world's 30 top banks must raise moneythrough long-term bonds in order to be able to cover from 2019the costs of their being wound up if they fail.

This rainy day fund is to amount to at least 16 percent of abank's risk-weighted assets from 2019 and be even bigger 10years later, to ensure that taxpayers would no longer have tobail out banks like during the 2007-08 financial crisis.

The need to create such Total Loss-Absorbing Capacity (TLAC)concerns among others Britain's HSBC and Barclays and Germany's Deutsche Bank.

The European Commission, which is in charge of transposingglobal rules into EU legislation, suggested in April that theTLAC requirement may be extended to smaller European banks thatare considered systemically important in domestic markets.

This would mean including medium-sized lenders such asGermany's Commerzbank and Britain's Lloyds BankingGroup, now exempt from the global TLAC.

"An extension of TLAC to domestic systemically importantbanks at this stage is unlikely," the EU official said onWednesday.

In April, a Commission official told a conference that theEU executive was still considering the matter.

A Commission spokeswoman declined official comment.

In a document, seen by Reuters, Germany and Britain hadurged the Commission to limit the scope of global bank-failurerules "only" to global systemically important banks.

TLAC forces lenders to hold a minimum of shares, bonds andother securities that may be liquidated if the lender needed tobe rescued, a requirement that increases taxpayers' protectionbut may raise banks' financing costs.

CAP-FLOOR BATTLE

The German-British paper also said that EU rules to preventtaxpayers from bailing out banks should not include a cap on theextent banks should finance their own winding up, the oppositeof the position held by two other big EU economies, France andItaly, who want clear limits.

The EU rule, known as Minimum Requirement for banks' ownfunds and Eligible Liabilities (MREL), entered into force inJanuary. Under that law, some 140 European banks have to holddebt that would be used to finance their resolution, but theamount to be held is not pre-defined, as it is for TLAC.

MREL's purpose is the same as TLAC's but the two standardsare based on different benchmarks, which banks are still tryingto assess. The Commission will issue a proposal this year toalign the two standards as much as possible.

The French-Italian call for a cap on MREL would limit thepowers of the newly established EU body, the Single ResolutionBoard, which is in charge of setting a specific MREL for eachlender which it oversees. SRB chief Elke Koenig has often calledfor a floor on MREL, rather than a cap.

Burdened by a huge amount of bad loans, Italian banks arefinding it more difficult to raise MREL-eligible capital thantheir German counterparts.

The Commission has so far opposed a floor for MREL, but doesnot favour a rigid cap either. "The debate is likely to beframed around the concept of framed discretion" for the SRB, theEU official said. (Additional reporting by Tom Korkemeier; Editing by JanStrupczewski and Toby Chopra)