By Huw Jones
LONDON, Sept 22 (Reuters) - Forcing big banks to hold extra capital so that taxpayers do not have to bail them out in the next crisis will not work, Europe's banks said on Wednesday.
As the banking sector tries to head off a second wave of new rules the Association for Financial Markets in Europe (AFME) said capital surcharges could be counterproductive.
"Better supervision and better corporate governance are the core of a future financial system that is stable and strong," AFME acting Chief Executive Mark Austen told reporters.
"Taxpayers should not be required to bail out firms in future," Austen said.
AFME said drawing up a list of systemically important banks and introducing reforms like surcharges aimed solely at them would not create financial stability.
"Indeed, such a list could, paradoxically, produce the very opposite as firms known to be on it may be assumed by customers and counterparties to be 'too big to fail'," AFME said.
Global regulators have just agreed a package of tougher bank capital and liquidity rules for all banks, known as Basel III.
Regulators are now turning their attention to what extra measures are needed to make the very big banks safer and what they can learn from the collapse of Lehman Brothers in 2008, which brought the global financial system to its knees.
The Basel Committee of global regulators which drafted Basel III is now working on a combination of measures so that markets and investors can no longer assume some banks will not be allowed to fail because of their size.
Adair Turner, chairman of Britain's Financial Services Authority, signalled on Tuesday evening it was a case of when, rather than if, bigger banks face extra safeguards though not necessarily only in the form of capital surcharges.
He said there could be a combination of higher capital requirements, a bigger layer of subordinated debt, bail-in bonds or a statutory resolution procedure.
OPENING GAMBIT
The Financial Stability Board of regulators, treasury officials and central bankers from the Group of 20 leading economies will propose a package in November but "working out and implementing the details will take us into next year", Turner said.
Bank profits face other threats too.
On Friday, a five-person panel will set out its remit for a year-long probe into whether Britain's banks are too powerful and need to be broken up.
Experts said AFME's position was just an opening gambit, knowing it will not wash at a time when policymakers want further measures to tackle "too big to fail" banks.
"My feeling is there will definitely be some extra charges and it's more of a question of how much and trying to fight what those charges are," said Michael McKee, a partner at DLA Piper.
"From a bank's perspective nobody wants capital to be too high but you are better off having surcharges than being split up completely," McKee said.
AFME said it was simply launching ideas on how to deal with bigger banks, saying even enhanced supervision and corporate governance came at a cost it has yet to quantify.
It will hold a conference in Brussels on Nov. 30 as it tries to sway European Union policymakers drafting legislation due early next year on reforming bank resolution and the possible introduction of a levy.
Countries like Britain have already taken steps to beef up their corporate governance codes in a bid to resolve a longstanding problem of how to prod major investors into taking a closer interest in how banks are run. (Editing by Susan Fenton)