Banks brace for new regulatory hurdle Having largely surmounted a series of stress tests, Europe's leading banks are this month turning their attention to a new regulatory hurdle as G20 ministers pledge to end the problem of lenders that are "too big to fail." Ministers meeting in Brisbane for the G20 summit this month are expected to discuss a new standard for the loss-absorbing buffers top banks must hold. Some executives and analysts fear the regime, which will be rolled out across the biggest banks worldwide, could create particular headaches in Europe, given the weak profits of many of its lenders and the corporate funding structures prevalent on the continent. Analysts have put forward sharply varying estimates for the extra capital requirements stemming from the rules on so-called "total loss-absorbing capacity," but estimates extend into the hundreds of billions of dollars. Roberto Nicastro, group general manager at UniCredit says: "It would be very costly, since it would require issuing expensive junior debt. And it would be very complicated for European banks, given that many cannot realistically use holding companies to issue debt. He adds: "We estimate that in the worst case it could mean over €200bn of extra capital requirements for European banks. Commercial banks would need to comply with this by further reducing lending activity. The TLAC standard sets a minimum amount of capital and liabilities that can be written off when a bank gets into serious trouble, avoiding the need for taxpayers to stump up - as they did in the 2007-09 financial crisis. The new regime, which is being put together by the umbrella Financial Stability Board, will be subject to more detailed work next year and is expected to start biting no sooner than 2019. It will apply to so-called globally systemic banks such as HSBC, JPMorgan, Deutsche Bank and Santander. Draft terms suggest the requirement will be a minimum of 16-20 per cent of risk-weighted assets, but the final requirement could be closer to 25 per cent once extra capital buffers are factored in. The key question is what instruments are eligible as TLAC. Banks that have issued debt out of a holding company - as they frequently do in the US - could find it easier to fall in line with the new regime, because this debt should be readily earmarked for bail-in under the new regime, analysts predict. UK and Swiss regulators have been encouraging their banks to issue debt from holding companies too, as part of a strategy called Single Point of Entry under which losses are imposed on investors at a holding company level, keeping the bank's operating divisions below running smoothly. Gerald Podobnik, head of capital solutions at Deutsche, says that in Europe the few banks that use holding companies have not yet issued substantial amounts of debt out of these entities. "It's even more difficult for the 95 per cent of banks that don't have holding companies to begin with," he adds. Banks could reorganise to create holding companies, making bail-in easier, but this would be a significant undertaking. Mr Podobnik says the "neatest solution" in the EU would be to bring its existing bail-in rules into line with the TLAC proposals, in order to make sure banks" senior debt counts towards the requirements. The EU already has its own rules under the bank recovery and resolution directive, which requires banks to set aside a minimum amount of capital and debt that can be written down, but the level is calculated as a percentage of total liabilities and own funds - rather than risk weighted assets as with TLAC. While acknowledging differences between the two regimes, officials are sanguine about the revisions required in the EU, especially compared with earlier versions of the global standard that were discussed. Michel Barnier, the former EU internal market commissioner, says: "If you look at the timetable, these [TLAC] requirements are for 2019, and we already have a review planned by then." Mr Barnier adds that changes had already been made to the FSB proposals which were a "strong success for Europe." However European banks are watching developments anxiously. "A lot of this regulation has been created in the US with involvement from the UK, and Europe has not had a voice in this," complains one senior executive. There remains huge uncertainty over how the TLAC standard will work in practice, making it hard to figure out the detailed implications for lenders. Scope, a credit rating company, said in preliminary estimates last month that BNP Paribas might face a shortfall of €25.45bn if it had to meet a 20 per cent TLAC hurdle, while Santander would face a €17.55bn shortfall. Banks elsewhere in the world may also be forced to do some heavy lifting. Fitch, the rating agency, said JPMorgan, Wells Fargo and State Street could have the most to do among US banks, given they have a lower reliance on debt issued at a holding company level than rivals such as Morgan Stanley and Goldman Sachs. Additional reporting by Martin Arnold