Government leaders are expected to agree in November that the world's top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue, industry and G20 officials said.
The bonds, known as "gone concern loss absorption capacity" or GLAC, are seen by regulators as essential to stopping the world's 29 biggest lenders from being "too big to fail".
The plans are being drafted by the Financial Stability Board, the regulatory task force of the Group of 20 economies which declined to comment ahead of a G20 summit in November, when G20 leaders will discuss the reform before it is put out to public consultation.
The reform would put in place the final major piece of G20 regulation on banking as the global body turns to a "post-crisis" agenda of fostering economic growth and bedding down the rules it has approved.
There had been unease in Asia and parts of Europe over how big the bond issues need to be to provide this cushion but there is now a new optimism amongst bankers and regulators that the G20 will reach a deal in November.
"The industry is definitely in favor of making resolution, supported by an appropriately flexible concept of GLAC, work. That is the key pending aspect on ending too-big-to-fail," said Andres Portilla, director of regulatory affairs at the Institute of International Finance, a Washington-based banking and insurance lobby.
"What is likely to happen is that there will be a consultative proposal, but without all the detail that a lot of people would like," Portilla added.
However, a G20 source said a deal was not only expected but would also be more detailed than some parties anticipate, which is essential for conducting a thorough impact assessment before finalizing the rules.
"The authorities and the FSB are working to have a proposal that will contain sufficient granularity of numbers to be a meaningful consultation and quantitative impact study to calibrate the final rule," the source said.
Top banks expect they will have to hold GLAC bond capital equivalent to about 10 percent of their risk-weighted assets on top of their core capital buffers which currently stand at around 10 percent. But they hope for some leeway if they can show that they can already be wound down smoothly in a crisis because of simplified structures.
The G20 source poured cold water on this, saying regulators believe all the world's top 29 banks earmarked for tougher supervision will need a significant cushion of such so-called "bail-in" bonds for some time to show they can be shut without public aid.
Regulators ultimately want to price bank debt better and end the cheaper funding that too-big-to-fail banks enjoy because markets assume governments would never allow them to collapse.
END OF HEAVY LIFTING
Efforts by the authorities so far are having an impact.
"We have been lowering our systemic support assumptions for banks or changing their outlooks to 'negative' to reflect the ongoing effort by governments to try to eliminate that support," said Johannes Wassenberg, managing director of banking at Moody’s credit rating agency in Europe.
In May, Moody's lowered its outlook to 'negative' on more than 80 banks in the European Union after the bloc approved a law requiring banks to hold a buffer of potential bail-in debt like GLAC.
"Adopting GLAC is the final chapter in reforming the condition of banks," said Thomas Huertas, a former UK banks supervisor and now a regulatory consultant with EY.
The plans for bail-in bonds are among the last of what G20 officials call the "heavy lifting" on banking industry reforms that came in the aftermath of the financial crisis.
With much of the work on defining how to make banking safer completed, the G20's focus will shift to implementation of its rules and behavior at banks after lenders were fined for rigging the Libor interest rate benchmark, with similar allegations in the currency markets now emerging.
"After dealing with too big to fail, the next big section for the G20 is conduct and there will be a shift in attention to that issue," Huertas said.