Bank watchdog dampens hopes of big rowback on liquidity rule

LONDON, Sept 13 Thu Sep 13, 2012 12:09pm EDT

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LONDON, Sept 13 (Reuters) - A rule forcing banks to hold cash buffers to survive financial shocks must "raise the bar", a top regulator said on Thursday, dampening hopes among lenders for a big rowback so they can lend more to struggling economies.

World leaders have agreed to introduce the first global liquidity rule for banks from January 2015 as part of efforts to shield taxpayers from having to rescue banks again.

Lenders say that faced with capital requirements as well as a sluggish economy, the rule must be relaxed or delayed.

The Basel Committee on Banking Supervision authored the Liquidity Coverage Ratio (LCR) forcing banks to hold enough easily sellable assets to withstand 30 days of net withdrawals.

The committee, made up of central bankers and supervisors from nearly 30 countries, meets in Istanbul this week to look at how it could scale back core elements as some central bankers and regulators fear it will otherwise hamper recovery.

Committee chairman Stefan Ingves said on Thursday the review looks at whether it could create unintended consequences - a reference to crimping lending.

"The committee is therefore taking a careful and deliberate approach to reviewing the rules," he said in a speech in Istanbul made available to the media.

"But let me remind you that our goal is to raise the bar. It is designed to have an impact on banks and markets - that is not unintended," Ingves said.

The top four Swedish banks already meet the rule, said Ingves, who is also governor of Sweden's central bank.

A person familiar with the review said there was a growing feeling among some regulators that there should be some leeway for banks until economic recovery returns.

The "stress scenario" used to calibrate the ratio will likely be tweaked, meaning a smaller buffer would be needed for each bank.

"I don't think it's too much of a dilution but we are in the midst of a profound funding crisis in Europe. We want to make sure we have got the rule right," that person said.

Basel is also likely to make it easier for banks to run down the ratio below 100 percent of their required amount in tough conditions, but there is disagreement over "parameters" or how far below this 100 percent mark banks would be allowed to go.

Banks expect more flexibility on assets eligible for inclusion in the buffer as currently the bulk must be in top quality government bonds and the rest can be in highly rated corporate debt.

Some banks want to include shares and asset-backed securities.

Ingves said the committee is "on track to deliver" any revisions around the end of this year.

Britain has pushed ahead to introduce mandatory liquidity buffers for top banks that total around 500 billion pounds.

The Bank of England's Financial Policy Committee said in June banks could ease their buffers to help haul the country out of recession. (Editing by Hugh Lawson)

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