BoE says big banks must change structure to meet bail-in rules

By Huw Jones

LONDON (Reuters) - Some banks will have to make internal changes to show regulators they can be closed smoothly in a crisis and without taxpayer bailouts, Bank of England (BoE) Deputy Governor Jon Cunliffe said on Friday.

Policymakers don't want taxpayers to shore up troubled lenders again after public anger over government rescues of banks during the 2007-09 financial crisis.

Moving to an effective "resolution" regime to wind down banks in trouble without disrupting the wider financial system will require "major transition", Cunliffe told a regulatory conference in Brussels.

For example, banks may have to ensure their operating units are clearly defined, so some can be closed down without affecting critical parts such as payments.

"There will inevitably be higher costs as the implicit public subsidy is removed. There is no free lunch," Cunliffe said.

The BoE regulates banks such as Lloyds, RBS, HSBC and Barclays in Britain, rolling out new European Union rules that require lenders to issue "MREL" or a new type of bond that will be written down when a bank's capital is depleted, thus shielding taxpayers.

There was volatility in markets earlier this year when investors were unclear about when a write-down would take place and what happens to missed interest payments.

Cunliffe sought to soothe market concerns on Friday, saying the transition to the new bail-in bonds regime would be "proportionate, gradualist" and provide "clarity to banks and their creditors".

"In keeping with the second key principle, gradualism, the Bank is proposing to allow the full four-year transition period for banks to meet their MREL requirements," Cunliffe said.

"This will allow the market for MREL-eligible debt to develop and allow banks to smooth out their debt issuance, minimising issuance and interest costs."

He also warned that unprotected depositors in the small, simple banks that won't be required to have bail-in debt should be clear they stand next in line after shareholders when it comes to absorbing losses.

Currently, deposits up to 75,000 pounds ($110,000) are protected under Britain's deposit guarantee insurance scheme.

($1 = 0.6839 pounds)

(Reporting by Huw Jones; Editing by Mark Potter)