* Weaker banks should move early to meet Basel III
* Senior central banker sees "pockets of exuberance"
By Huw Jones
LONDON, Oct 18 (Reuters) - The world's weakest rather than strongest banks should be seeking first mover advantage in building up capital levels ahead of a global rule deadline, a senior European central banker said on Monday.
Leaders of the world's top 20 economies (G20) are set to endorse tougher bank capital rules next month, setting a 2013 deadline to comply with rules that must be met in full by the start of 2019.
But major banks such as Deutsche Bank and Standard Chartered -- widely seen as stable by investors -- have already stepped forward to raise new capital to help meet the tougher Basel III requirements.
Peter Praet, executive director at the Belgium central bank and member of the Basel Committee that drafted the global Basel III, said it was more important to encourage the weaker banks to step forward early.
"Some firms are going to frontload, some of the others not. It's not so necessary that the strongest banks come to the markets today," Praet told a London School of Economics conference on regulation.
Supervisors should convince the weaker institutions to raise capital now and not wait until the end of 2018, Praet said.
"Sometimes it is better to bite the bullet directly. Not doing that will create uncertainty over the years," Praet added.
"Some firms are going to frontload and so we don't know the capacity of the markets to absorb that."
Bankers said privately they want to move early and meet Basel III ahead of time if they can otherwise markets will demand a higher premium for holding their debt.
Praet said there are still "pockets of exuberance" in markets which are still too "procyclical" -- a description which refers to how prices of currencies, government bonds or other assets can be exaggerated to create volatile trading.
ELEPHANT HIDE NEEDED
Regulators have vowed to "take away the punchbowl" and take measures earlier to avoid future asset bubbles bursting and sparking the need for more bank rescues.
After rapid progress in agreeing Basel III, supervisors said broader, macro measures needed to dampen procyclicality would take far longer.
There is no agreement on how to dampen such exuberance and whether slapping extra "countercyclical" capital charges on "systemically important" banks to safeguard financial stability would work, regulators at the conference said.
Charles Goodhart, a former member of the Bank of England's monetary policy committee said Basel III will fail to stop procyclicality and that supervisors would need "the hide of an elephant to take countercyclical measures."
"We don't know how we measure what is a systemically important institution, don't know how to measure financial stability or inter-connectedness. That's all we have got with financial stability -- it's either wartime or peacetime."
Praet said setting up effective resolution mechanisms for ailing banks will take many years.
The European Union's executive European Commission presents its ideas on resolution this week and Praet said its competition unit should also play a more prominent role in resolving banks.
A top banker said cross-border resolution mechanisms could be agreed within a few years if there was the political will.
But the prospect for a common international approach to tackling failing banks appears remote as the United States focuses on powers for regulators to seize a bank and break it up, regulators said.
The EU, faced with many national bankruptcy and insolvency laws, is opting for a more cooperative approach for dealing with cross-border banks such as methods for turning debt held by creditors into equity to boost capital levels.