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LONDON (Reuters) - Global regulators aim to crack two of the biggest barriers to ending "too big to fail" banks by the end of this year, Financial Stability Board Chairman Mark Carney said on Monday.
Regulators are putting in place a complex jigsaw of rules and mechanisms to wind down failed banks without the massive market fallout seen when Lehman Brothers went under in 2008.
The FSB is the regulatory arm of the Group of 20 leading economies (G20) and Carney said progress is expected by December on requiring the world's top banks to hold capital or bonds in the event they collapse.
The aim is to shield taxpayers, who had to shore up lenders in the 2007-09 financial crisis, when it comes to ensuring key parts of a lender, such as its payments system, can continue.
The derivatives industry will be asked to propose by September how derivatives contracts can be amended so their closing out is suspended for a day or two to give regulators time to wind down a bank that has failed.
"We are looking to put ourselves in a position by Christmas to have cracked the two biggest issues," Carney told a reporters after an FSB meeting in London.
Solving the "too big to fail" problem is seen by regulators as key to restoring trust among themselves so they rely on globally coordinated rules rather than going it alone.
The Federal Reserve, for example, has angered the European Union by adopting a new rule requiring foreign lenders, such as Deutsche Bank or Barclays to hold capital and liquidity at branches in the United States even though they already hold capital back home.
EU officials have complained that such a rule will fragment global markets at a time when they are needed to aid recovery.
The FSB, tasked with ensuring coordination in regulation among the G20 members, has no powers to force the United States or other countries to row back on national reforms and relies on peer pressure for persuasion.
Carney said a project is underway with the IMF and the OECD to assess the cross-border implications for financial stability and markets of these unilateral reforms to banking structures.
Apart from the new Fed rule for foreign banks, Britain is requiring retail arms of lenders to hold more capital to shield account holders. France and Germany have also announced national initiatives to isolate risky trading at banks.
Carney said the findings will be presented to G20 leaders at their summit in Brisbane, Australia in November.
Meanwhile, putting in place a workable cross-border framework for closing failed banks smoothly could prompt a rethink of such national initiatives, he said.
"But those types of decision can only be made when all the pieces of the puzzle have been put together," Carney said.
"The point being, that as we get to the end of this year and make the progress we intend to, that then maps into adjustment of the resolution plans in firms and potentially, one would hope, some adjustment in the applications of national decisions," Carney added.
The EU has proposed structural reforms for banks which largely dovetail with what its three biggest members, Britain, France and Germany are already doing.
The 28-country bloc, however, is unlikely to approve the reform before 2015, giving the FSB time to persuade the Fed to have a rethink and avoid a tit-for-tat response from Europe that banks say will bump up costs and harm market efficiency.
Reporting by Huw Jones and Andy Bruce, editing by David Evans