Five years since the start of the financial crisis, taxpayers would still be forced to foot the bill should more banks fail because countries are delaying alternative solutions. Finding a way to shut down big banks quickly without triggering market mayhem - the threat of which prompted governments around the world to resort to publicly-funded bailouts between 2007 and 2009 - remains a mammoth task.
Britain, Switzerland and the United States, frustrated by the slow pace of reform, have drawn up plans giving their local regulators power to step in should a major lender go bust. But they still need a global deal to give those same powers to regulators worldwide if the laws are to be effective. The U.K. published its plans this month, hoping to get other countries moving and draw lessons from the collapse of Lehman Brothers in September 2008, the impact of which is still being felt in the markets.
"The U.K. may have set the pace but progress will be made based on the speed of the peloton and not all countries seem to be following the same schedule," said Steven Hall, a partner at KPMG which advises banks on resolution. "First past the finishing line won't mean a gold medal unfortunately unless we can get everyone working to similar timetables and agendas."
Similarly concerned by such slow progress the Financial Stability Board (FSB), which vets the world's top economies, has launched a public review of how far G20 countries have come in implementing new so-called resolution laws, ten months after it listed the powers they must give to their financial regulators.
Few countries have implemented new legislation so far.
"Unfortunately it's about herding cats," a person familiar with the G20 process said. "Progress is patchy." The next few weeks are crucial if this bank reform is to stay on the agenda.
The FSB has ordered G20 countries to outline by September their strategies for winding down their top banks without state aid if they hit terminal trouble.
Then in December twenty-nine top banks identified by the FSB must submit "living wills" to show how they would cope with a big market shock without the taxpayer help that angered the public and hit government finances.
Officials are not confident, however, that the first deadline will be met. That would make the second largely irrelevant. If deadlines are missed, the financial markets are likely to react in adverse fashion to news that many major banks are still not bomb-proof.
"There is a danger of this losing momentum as many countries don't have resolution powers. A living will without resolution powers is not worth anything," a regulatory official from a G20 country said on condition of anonymity.
National financial regulators have set up crisis management groups for 24 of the 29 biggest banks but the FSB has warned that much more work is needed on resolution plans and cross-border supervisory cooperation.
Finance industry officials doubt that big banks in many countries can fully meet the December FSB deadline for their living wills given the time it takes to compile them.
Britain forced its six biggest banks, HSBC, Barclays, RBS, Lloyds, Standard Chartered, and the UK arm of Spain's Santander to submit their living wills in June, six months early.
Those banks, which declined to comment for this article, began working on pilot versions back in 2009-10.
Clashes Over BondholdersMost European Union countries put their individual plans for dealing with failed banks on hold after proposing just one cross-border law to deal with all the banks in the zone.
That law has still not been approved however as countries argue over the details.
There are clashes in particular over how bondholders in a bank should suffer losses to underpin a collapsing lender and thus shield taxpayers.
Some countries fear these "bail-ins" will put investors off buying bank bonds and that even if the law passed it would be years before they could take effect.
So regulators are looking at ways to penalize banks whose living wills don't appear workable in practice, such as by forcing them to hold extra capital until changes are made.
That would be a painful penalty given that banks are already being forced by new global legislation known as Basel III to hold capital of at least 7 percent in order to protect against risky bets and bad debts. "It seems the Financial Services Authority is already linking the...credibility of recovery options with a potential increase in capital funds," said Etay Katz, a financial partner at Allen & Overy.
Another lawyer said some lenders are being told to hold more capital or find other way to make themselves easy to wind down as regulators take inspiration from approaches taken elsewhere.
"Switzerland has an explicit (capital) buffer that is linked to resolvability. We don't have one yet in the UK but that may come up next year," a UK official familiar with the debate said.
The FSA had no comment.
UK regulators will give each of the country's six big banks a year or so to comply with rules on being "resolvable".
Along the way more questions are likely to arise, such as the ability of banks in the process of shutting down to outsource some services outside of the EU.
Some lawyers say easy resolution of a big bank is "fiction". Others, like Thomas Huertas, an Ernst & Young consultant and former top UK banking supervisor, argue structural changes alone may not be enough.
But bank regulators are determined, and say the continuous process can only bring about improvements.
"This is still early days in what is a long and permanent process in which both banks and regulators learn along the way," said Chris Bates, a lawyer at Clifford Chance.
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