European Central Bank policymaker Axel Weber said on Monday that banks must be allowed to fold and backed the idea of issuing special bonds which would automatically convert to equity in the event of a crisis.
Top European commercial and central bankers are divided over how to regulate major financial institutions, especially when they hit the buffers.
The head of Deutsche Bank, Germany's largest lender, raised concerns about proposed regulations to deal with institutions which are deemed "too big to fail", because these banks could threaten the stability of the wider financial system.
Deutsche <DBKGn.DE> CEO Josef Ackermann called for a level playing field on the first day of Euro Finance Week, a gathering of top bankers and policymakers.
Proposed regulations threaten to put European banks at a disadvantage to competitors in other regions, he said.
Weber, however, reiterated the need for stricter rules, saying a stable banking system was vital for long term growth. He highlighted so-called "bail-in" instruments such as CoCos (bonds that convert to equity under certain conditions) as one option for banks that play a key role in global finance. "Even though there are a number of open questions, these alternatives seem worth considering," the Bundesbank president said, adding that banks need to be allowed to fold to avoid complacency and so-called 'moral hazard' among bankers.
But the knotty issue of what constitutes a systematically relevant bank appeared no nearer to being resolved.
Ackermann said defining this based solely on whether a home country can afford to rescue the bank would leave lenders in the eurozone at a competitive disadvantage relative to peers.
"Then we can only have large U.S., Chinese and maybe in (the) future, Brazilian banks," Ackermann told the Frankfurt conference.
Bank executives at the annual gathering are worried that yet more regulation on top of measures discussed at the G20 summit in Seoul, which ended a few days ago, will dent bank profits and, potentially, national economies.
Ackermann also warned of a "race to the top" as financial institutions implement the Basel III capital adequacy rules. While these had asked for a core tier one ratio of 7 percent, markets will expect 10 percent or more, the Deutsche CEO said.
Alfredo Saenz Abad, CEO of Banco Santander <SAN.MC>, praised Basel III, but said deciding on whether a bank was systemically risky needed to be constantly monitored.
