Bank of England Deputy Governor Paul Tucker said the EU law
on bank recovery and resolution would be a milestone towards a
global system and help convince markets that governments were no
longer willing to rescue “too big to fail” lenders.

Since governments had to shore up banks during the 2007-09
financial crisis, regulators have wanted to stop markets
assuming big banks would not be allowed to go out of business.

The European Parliament’s economic affairs committee holds a
first vote in Strasbourg, France at 1830 GMT. It has joint say
with EU states on the law that gives regulators powers to impose
losses on creditors, replace management and take other steps
when a bank gets into trouble.

In a speech in the Netherlands, Tucker said there had been
“marked convergence” recently on a global approach to winding
down banks which typically have operations in many countries.

But more political impetus was needed as it would still be a
“nightmare” to wind down a big bank, he added.

The EU law will have powers to force big banks to hold a
cushion of bonds that can be converted into equity to shore
itself up without taxpayer cash. Tucker said a discussion on
such a cushion at the global level was still needed.

This “loss-absorbing” cushion should be equivalent to the
amount of capital a lender holds in its capital buffer with an
added margin for safety, he said.

The biggest banks will have to hold a core capital cushion
of up to 9.5 percent by 2019 though many are already at or above
this level due to market and supervisory pressures.

Banks should not hold large amounts of bonds of other banks
and nor should insurers hold chunks of bank debt, Tucker said.

He backed EU consensus that depositors with up to 100,000
euros ($128,000) in their account should not suffer losses in a
bail out, a step Monday’s vote is expected to confirm.

There was also case for some uninsured depositors, such as
small businesses and charities to be shielded also, he added.

EU finance ministers agreed last week that large, uninsured
depositors should be subject to losses and the vote on Monday is
expected to back this, on condition that any losses are imposed
only after the bank’s bondholders have been tapped first.

Even with an EU system in place, many banks will still need
to restructure themselves to be wound up easily, Tucker said.
The EU’s financial services chief Michel Barnier will say in the
autumn whether big banks should be broken up.

The European Banking Authority will next week for the first
time put a number on where it would like its planned bonus cap
to start and PwC said in a statement that the threshold would be
set at 500,000 euros.

The EU watchdog’s board met on Thursday and a spokeswoman
declined to comment before the paper is released formally for
public consultation.

Banking pressure groups and bank officials also all declined
to make any comment but at least one major financial sector law
firm said it had already had numerous inquiries from banking
clients on the issue.

Jon Terry, a partner at PwC, said the 500,000 euro threshold
would increase the number of staff subject to bonus capping
perhaps by as much as 10 times for some investment banks
operating in London in comparison with current UK rules.

“This will create a major challenge for banks as to how they
reward their staff,” Terry said. “Bringing more people into the
stringent pay rules again further widens the gap between pay
practices in Europe and the rest of the world.”

At Barclays, for example, at least three times as
many staff would be caught by a 500,000-euro bar than under a
stricter definition of people in key risk positions.

Barclays designated 393 people as “code staff” in 2012,
defined as employees whose activities could have a material
impact on the bank’s risk. But 1,338 staff were paid 500,000
pounds ($765,400) or more last year, according to the bank’s
annual report in 2012.

CREATIVE APPROACH

Peter Snowdon, a financial services lawyer at Norton Rose in
London said clients had already been calling him up to ask about
the implications of the 500,000 euro threshold.

“It is obviously something that has significant implications
for European business and will certainly lead some people to
wonder if they can be bothered,” Snowdon said.

The European Union is looking at several ways to make banks
pay for the billions in help they have received from governments
and central banks to stay afloat in the financial crisis,
including a possible tax on financial transactions being
considered by 11 member states.

In March the EU approved a new law barring bankers from
awarding themselves payouts worth more than their salary, by far
the world’s most stringent curb on financial sector pay.

The moves are in response to public anger at big bonuses at
lenders rescued by taxpayers and as part of broader efforts to
dampen excessive risk taking.

The EBS is now fleshing out the law by setting out a pan-EU
definition of who should be subject to the bonus cap. Currently
there is no common definition of who must comply with the bloc’s
existing remuneration curbs.

Christopher Mordue, a specialist employment lawyer at
Pinsent Mason in London said the “massive” extension to the
bonus net will raise concerns about damage to the
competitiveness of London as a financial centre.

“So this proposal will also intensify the search for
creative solutions which allow existing levels of overall
remuneration to be retained.”

The European Banking Authority (EBA) said on Thursday it
will set out guidelines for the review, which will delay the
bloc’s next round of stress tests until 2014.

EBA Chairman Andrea Enria said the checks would help boost
the credibility of the next pan-EU stress test of banks.

Previous stress tests failed to spot problems on bank
balance sheets in euro zone countries including Spain, Ireland
and Cyprus which required international bailouts.

The European Central Bank needs to finding any remaining
problem areas before taking banks under its wing in the first
stage of a planned banking union.

The results will also be important for the debate over the
next stage of the banking union – the creation of an authority
to wind up troubled euro zone banks quickly.

The asset quality review will be conducted by the ECB in the
17 EU countries that are joining the new European Banking Union.

In the remaining 10 EU member states, the national banking
regulator will conduct the review, selecting which banks to
focus on and which assets to scrutinise.

The EBA said the actual timing of the asset review and
subsequent stress test will be determined once a new law setting
up the ECB as banking supervisor in the 17 euro zone countries
is adopted.

The results of the asset quality reviews are expected to be
published alongside the outcome of next year’s stress test.

If the revised draft the International Accounting Standards
Board and U.S. Financial Accounting Standards Board issued on
Thursday is adopted, tens of thousands of firms worldwide will
have to add all leases over a year to their balance sheets.

The proposals signal their refusal to back down further in
the face of opposition from companies, who worry that bigger
balance sheets will make them look more indebted and bump up
their borrowing costs.

The bulk of leases are currently only mentioned in
footnotes.

“The proposal is responsive to the widespread view of
investors that leases are liabilities that belong on the balance
sheet,” FASB Chairman Leslie Seidman said in a statement on
Thursday accompanying a revised draft of the rules.

The reform, which may not take effect until 2016 in view of
the corporate opposition it faces, is part of efforts to align
international and U.S. book-keeping rules so markets can compare
firms more easily and get a clearer view of their liabilities.

“At present, investors must take an educated guess to
determine the hidden leverage from leasing by using basic
disclosures in financial statements and applying arbitrary
multiples,” IASB chief Hans Hoogervorst said in the statement.

More clarity on lease liabilities could break some
corporations’ loan covenants, which are linked to balance sheet
size limits, or even trigger credit rating changes, accounting
experts say.

And the sums involved are huge.

In Europe, outstanding leases totalled $928 billion in 2011,
according to Leaseurope, which represents over 90 percent of the
European leasing market.

In the United States, companies have about $1.5 trillion of
operating leases according to a study commissioned by the U.S.
Chamber of Commerce and real estate groups.

The two boards have backed down from their original plan to
treat all leases in the same way, and confirmed on Thursday that
they would pursue a “dual track” approach to distinguish between
property and equipment leases, as reported by Reuters.

Instead of the current “straight line” rental expense that
stays the same throughout the life of a lease, the new standard
would treat most equipment leases like loans, with the highest
costs in the earlier years.

Property leases would still be treated as a straight line
expense, but there is no change to the basic principle that all
types of leases longer than a year must be put on balance
sheets.

Industry bodies had been hoping for further concessions.

“Leaseurope consider that they will not bring about a
sufficient improvement in financial reporting to warrant the
cost and complexity of changing the existing approach,” the
industry body said.

Leaders of the Group of 20 economies (G20) pledged in 2009
to make off-exchange traded derivatives like credit default
swaps more transparent. They wanted rules in place by the end of
2012, but this has proved difficult to achieve.

The delay is partly because regulators want a common
approach to avoid costly overlaps that could distort markets and
competition among banks.

“We have an aspirational goal of September for reaching
resolution on some of these issues,” Brian Bussey, associate
director for derivatives policy at the U.S. Securities and
Exchange Commission (SEC), told a Chatham House roundtable.

The September deadline coincides with a G20 summit in Russia
to review progress on the rules.

The plan is for the $640 trillion derivatives sector,
dominated by 16 big banks, to have all trades recorded and
cleared by third party clearing houses that are backed by a
default fund.

Regulators’ focus is on derivatives because of the central
role they played in the financial crisis. Lack of transparency
created uncertainty over who was exposed when Lehman Brothers
and insurer AIG got into trouble.

The United States and the European Union are trying to meet
the G20 pledges with domestic rules, such as the U.S. Dodd Frank
Act. But there are differences emerging over how far each
country can regulate “cross-border.”

The SEC and the main U.S. derivatives regulator, the
Commodity Futures Trading Commission (CFTC), Mexico and Canada
have outlined how they will treat cross-border derivatives.

“Very little is coming out of Europe,” Eric Pan, SEC
associate director for international affairs, said at the
Chatham House event.

Until regulators publish their approaches it will be hard to
tackle overlaps that risk distorting competition, Bussey said.

The EU’s European Commission executive said it published an
outline of its cross-border approach as far back as last August.

“Rather than Europe delaying things, we are actually a year
ahead of the United States,” Patrick Pearson, the commission
official responsible for derivatives, told Reuters.

Finance ministers from the EU, Asia and Latin America have
asked the United States for a flexible approach to derivatives
and a response is still awaited, Pearson said.

The SEC is keen for the EU to accept that U.S. rules for
clearing houses are “equivalent” to the bloc’s rules so clearers
like ICE don’t face multiple standards.

But Europe has criticised the CFTC for the cross-border
reach of its new derivatives rules. As a result, the SEC is
trying to broker a compromise by proposing a more accommodative
“middle way” welcomed by global regulators.

The SEC’s middle way achieves the goal of keeping global
derivatives markets open, Anne Wetherilt of the Bank of
England’s markets division, told a Futures and Options
Association seminar on Wednesday, which Bussey and Pan also
attended.

“We need to resolve how (bank) branches are treated
differently. If we have our way we would rewrite Dodd Frank,”
Tom Springbett, a senior official at the UK Financial Conduct
Authority told the seminar.

Brussels-based Euroclear and the Depository Trust & Clearing
Corp (DTCC) of New York have agreed to build a new platform to
combine available collateral into a single pool.

“It’s too early to say when the launch will be. We are
scoping it in detail,” said Saheed Awan, head of global
collateral services at Euroclear.

The derivatives market lay at the heart of the 2007-09
financial crisis, creating uncertainty when large users like
Lehman Brothers bank and insurer AIG got into trouble.

New rules are being phased in this year seeking to safeguard
the $640 trillion market for financial derivatives like interest
rate and credit default swaps.

As a result banks will have to find more collateral, such as
cash and government bonds, to set against a wider range of
trades in case of default.

The Euroclear/DTCC venture will give European and U.S.
investment banks a near real-time view of how much collateral
they can call on quickly.

“The savings being forecast by some of the investment banks
are in the tens of millions of dollars in efficiency costs in
having one pool of collateral,” Awan said.

The demand for posting collateral, also known as margining,
is forecast to rise sharply because of the tougher rules, which
have triggered industry warnings of a “collateral crunch” of
anything between $800 billion and $10 trillion.

Awan said he expected banks and other settlement systems
providers to plug into the new joint venture, enabling it to be
run as an industry cooperative.

Euroclear is already linking up with Asian partners in South
Korea and Hong Kong to provide collateral, Awan said, and the
joint platform with DTCC would extend that project.

Euroclear and DTCC are also setting up an electronic
messaging service, allowing banks to send information about
margin requirements at the blink of an eye rather than the
slower system of emails and faxes. It will rolled out from the
first quarter of next year.

Euroclear holds about 23 trillion euros in assets for
clients, while DTCC provides custody and asset servicing for
issues worth $37.2 trillion.

Already pared back once to reduce its impact on real estate
leasing, a proposed new international lease accounting standard,
under development for years, will reach a turning point in May
when standard setters unveil a detailed draft rule.

The standard could potentially affect leases of assets
ranging from passenger jets and storefronts to cargo containers
and photocopiers. But it is unlikely to be finalized until next
year, possibly taking effect in 2016 or 2017.

In the meantime, the standard setters can expect to be
challenged by an assortment of lease-dependent businesses, such
as airlines, restaurants, drugstore chains and other retailers.

Many such companies are accustomed to being able to consign
their lease commitments to footnotes of financial statements,
where they get less attention than they would if they were
included in the balance sheet.

For instance, U.S. retailer Walgreen Co. leases most
of its more than 8,000 drugstore properties. The Illinois-based
company has $35 billion of operating leases that are not shown
on its balance sheet. A Walgreen spokesman declined to comment.

To some accounting experts, putting leases off the balance
sheet obscures the portrayal of a company’s liabilities.

“Significant reform for lease accounting is crucial for the
credibility of all financial reporting and for those who
regulate it, use it, audit it and implement it,” said Paul
Miller, a University of Colorado accounting professor.

Without recognizing leases, he said, “the balance sheet is
not complete, and if it’s not complete, then it’s not useful.”

ONE-YEAR CUT-OFF SEEN

The expectation is that, if it is completed as planned, the
standard would force many companies to reflect lease commitments
that extend for more than a year on the balance sheet, like
debt. Tens of thousands of companies would be affected.

Opponents of the standard question if changing it is worth
the effort and the costs it would impose on businesses.

“There should be a cost-benefit analysis that attaches here
if we’re going to go through this,” said Tom Quaadman, a vice
president at the U.S. Chamber of Commerce, a Washington,
D.C.-based business lobbying group opposed to the new standard.

For investors, such a change could be a shock. More clarity
on lease liabilities could conceivably break some corporations’
loan covenants or trigger credit rating changes.

The new rule’s impact on leverage in banking and retailing
would likely be significant, said Peter Hogarth, a partner at
accounting firm PricewaterhouseCoopers in London.

The standard is being developed jointly by the Financial
Accounting Standards Board, based in Connecticut, and the
International Accounting Standards Board, in London.

FASB writes the United States’ Generally Accepted Accounting
Principles, known as GAAP. IASB’s International Financial
Reporting Standards, or IFRS, prevail in much of the rest of the
world.

Merging GAAP and IFRS has been a goal of standard setters
for years and recently was backed by Group of 20 world leaders,
but it has proved to be elusive. The lease standard is seen as a
showcase meant to prove accounting “convergence” can be done.

OVERHAUL OVERDUE?

Lease accounting has not had a major overhaul in the United
States since the 1970s.

Leases were once used mostly by companies unable to afford
buying equipment or real estate, but today they account for over
a third of capital investment. Leases give companies purchasing
power and flexibility in upgrading worn-out or obsolete assets.

In Europe, outstanding leases totaled $928 billion (712
billion euro) in 2011, up from $838 billion(634 billion euro)in
2006, according to Leaseurope.

In the United States, companies have about $1.5 trillion of
operating leases, according to a 2012 study commissioned by the
U.S. Chamber of Commerce and real estate groups. Real estate
leases made up about $1.1 trillion of the total.

Lobbyists expect some sort of new rule to result from the
standard setters’ efforts, but more watering down seems likely,
possibly by raising to two or three years from one year the term
of leases exempted from stricter treatment.

IASB and FASB backed down last year from requiring all
leases to be treated the same way by agreeing to make an
exception for property lease rental expenses.

Peter Cosmetatos, director of finance policy at the British
Property Federation, said there was a sense of slowing momentum.

Some regulators said there may not be a converged final
standard if it is too complex. At FASB, support is fragile. The
proposal cleared the board by just 4-3 in an April 10 vote.

Opponents of the standard include Leaseurope, a leasing
industry lobbying group, and a U.S. coalition led by the U.S.
Chamber of Commerce and real estate groups.

These opponents have secured allies in Washington. Urged on
by lobbyists, 60 members of Congress wrote to standard-setters
last year to push them to rethink the rule.

Real estate firms have been opponents, warning that the new
standard could undercut a commercial real estate recovery.

FOR SALE OR LEASE

Balance sheet debt is not the only worry for businesses. The
impact on the income statement and profits is also a concern.

Instead of the current “straight-line” rental expense that
stays the same throughout the life of a lease, the new standard
would treat most equipment leases like loans, with higher costs
in the earlier years. One important exception to this would be
real estate lease costs, which would still be straight-lined.

For instance, an airline that signs a 17-year, $100-million
lease for aircraft would see expenses jump by $2.4 million or 26
percent in the first year of the lease, according to data from
the Equipment Leasing and Finance Association.

“It has the effect of looking like an increase in the cost
of debt to a company,” said Bill Bosco, a consultant working for
the U.S. Equipment Leasing and Finance Association. “It eats
into capital and it reduces earnings.”

The FCA said the capital on 2.6 million interest-only home loans will be due for repayment over the next 30 years, with 10 percent of those having no strategy for paying back the money.

Nearly half of the loans, which only pay off the interest on the loan and not the capital, face a shortfall averaging 71,850 pounds, with customers “over-optimistic” about their ability to pay, the watchdog said.

The FCA was launched last month with a specific remit to protect consumers and end a history of mis-selling financial products, including endowment mortgages and pensions, stretching back two decades or more.

The FCA aims to head off problems earlier, rather than waiting for problems to gather critical mass before intervening, as regulators did in the past.

The sluggish economy’s squeeze on household income is already prompting some borrowers to switch to an interest-only mortgage because of the lower monthly payments.

Interest-only mortgages allow home buyers to only repay the interest each month, has been sparked by a crackdown on affordability checks, due to come into force next year.

“By acting now we are aiming to nip this problem in the bud,” FCA chief executive Martin Wheatley said in a statement.

Britain’s Council of Mortgage Lenders said its members will be stepping up contacts with borrowers of interest-only loans.

“Most people, even if they have not yet done so, have time to plan a satisfactory strategy for when their mortgages reaches maturity,” CML director general Paul Smee said.

FCA officials said lenders will ask their customers if they could afford to switch to a standard home loan where monthly repayments include interest and capital.

The watchdog has been given new powers to ban products but for now is holding back on introducing mandatory rules.

Instead, it has set out guidance on how lenders should deal with interest-only mortgage customers who risk being unable to pay back the capital.

Wheatley has in the past described interest-only home loans as a “ticking time-bomb”, but banks, who already face a compensation bill of over 12 billion pounds for mis-selling loan insurance, will be relieved by findings on interest-only loans.

Two studies commissioned by the FCA and released on Thursday do not point to a new mis-selling scandal brewing, and show there has been no surge in complaints, a classic indicator of a serious problem, the watchdog said.

Only 2.5 percent of customers with interest-only mortgages said they were not aware they needed a repayment plan and don’t have one in place, the FCA studies showed.

Tighter rules on all home loans will be introduced in April 2014 by the FCA, such as closer scrutiny of a borrower’s ability to repay the money.

Many banks no longer offer interest-only mortgages and those that still do have tightened their conditions.

(Reporting by Huw Jones; Editing by Louise Heavens)

The Financial Conduct Authority (FCA) said the capital on
2.6 million interest-only home loans will be due for repayment
over the next 30 years, with 10 percent of those having no
strategy for paying back the money.

Nearly half of the loans, which only pay off the interest on
the loan and not the capital, face a shortfall averaging 71,850
pounds ($111,800), with customers “over-optimistic” about their
ability to pay, the watchdog said.

The FCA was launched last month with a specific remit to
protect consumers and end a history of mis-selling financial
products, including endowment mortgages and pensions, stretching
back two decades or more.

The FCA aims to head off problems earlier, rather than
waiting for problems to gather critical mass before intervening,
as regulators did in the past.

The sluggish economy’s squeeze on household income is
already prompting some borrowers to switch to an interest-only
mortgage because of the lower monthly payments.

Interest-only mortgages allow home buyers to only repay the
interest each month, has been sparked by a crackdown on
affordability checks, due to come into force next year.

“By acting now we are aiming to nip this problem in the
bud,” FCA chief executive Martin Wheatley said in a statement.

Britain’s Council of Mortgage Lenders said its members will
be stepping up contacts with borrowers of interest-only loans.

“Most people, even if they have not yet done so, have time
to plan a satisfactory strategy for when their mortgages reaches
maturity,” CML director general Paul Smee said.

FCA officials said lenders will ask their customers if they
could afford to switch to a standard home loan where monthly
repayments include interest and capital.

The watchdog has been given new powers to ban products but
for now is holding back on introducing mandatory rules.

Instead, it has set out guidance on how lenders should deal
with interest-only mortgage customers who risk being unable to
pay back the capital.

Wheatley has in the past described interest-only home loans
as a “ticking time-bomb”, but banks, who already face a
compensation bill of over 12 billion pounds for mis-selling loan
insurance, will be relieved by findings on interest-only loans.

Two studies commissioned by the FCA and released on Thursday
do not point to a new mis-selling scandal brewing, and show
there has been no surge in complaints, a classic indicator of a
serious problem, the watchdog said.

Only 2.5 percent of customers with interest-only mortgages
said they were not aware they needed a repayment plan and don’t
have one in place, the FCA studies showed.

Tighter rules on all home loans will be introduced in April
2014 by the FCA, such as closer scrutiny of a borrower’s ability
to repay the money.

Many banks no longer offer interest-only mortgages and those
that still do have tightened their conditions.
($1 = 0.6425 British pounds)

(Reporting by Huw Jones; Editing by Louise Heavens)

Andrew Bailey, chief executive of Britain’s Prudential
Regulation Authority (PRA), said EU rules known as Solvency II,
due to come into effect in 2016 at the earliest, would not be
comprehensive enough.

“To mitigate this risk, we plan to use ‘early warning
indicators’ in our supervisory work,” Bailey said in a letter to
Andrew Tyrie, chairman of parliament’s Treasury Committee.

The PRA wants to avoid a repeat of the Equitable Life
scandal, which saw the world’s oldest life assurer nearly
collapse after making promises to policyholders that it could
not keep.

It is the latest example of Britain, which is home to the
EU’s biggest financial centre and had to bail out a number of
its banks in the wake of the 2008 financial crisis, losing
patience over EU curbs on national supervisors.

Solvency II is a set of European rules requiring insurers to
use approved in-house models to calculate their capital buffers.

Bailey said the indicators to be applied to British-based
insurers, which he did not detail, would trigger “immediate
supervisory action” if they suggested that insurers were using
the models to cut back on capital.

Tyrie said this was probably necessary as complex models are
all too easily circumvented.

Solvency II ia part of an EU drive for “maximum
harmonisation” that leaves little wiggle room for national
insurance supervisors to top measures up or water them down.

“We believe we can implement these early warning indicators
in the UK within the S-II framework, but in any event we would
pursue this approach and accept the risk of EU challenge,”
Bailey said.

If it imposes add-on rules, Britain could be taken to the
European Court of Justice, which has the power to enforce their
removal.

Britain has also been fighting for discretion to introduce
extra capital requirements on banks beyond EU-agreed levels from
2014; the insurance indicators echo moves by Bailey to counter
investor scepticism over how banks use in-house models to
determine capital requirements.

Bailey said flexibility was needed in the regulation of
insurers because Solvency II did not fully address risks such as
troubled sovereign debt.

Solvency II has been a decade in the making and was due to
come into effect this year, but has been delayed until at least
2016 because of disagreements over some of the fine detail.

“In particular, it is unclear to us that the French
authorities will now be able to agree to any directive that we
consider prudentially acceptable,” Bailey said. Germany is also
looking for a long phase-in of a decade or more, he added.