* Rule changes come with costly restrictions
* Some reform voices don't see larger breakdown
LONDON/WASHINGTON, Jan 7 (Reuters) - Banks have won a victory in their battle to dilute tough rules on liquidity, but they will still have to find trillions of dollars to ensure their funds do not run out in a crisis.
Heavy lobbying by banks over the past two years has bought them time, but not freedom from requirements that they lock up big new cash buffers globally from 2015.
And while some critics are blasting the Basel Committee for backing off the strictest aspects of the liquidity rule, other prominent reform voices are reluctant to say that it means a global commitment to tough new rules is falling away.
"It is a phase-in. It should be understood not as a repudiation of capital requirements but as phase-ins that are reasonable," said former U.S. Representative Barney Frank, who co-authored the 2010 Dodd-Frank legislation of financial reforms.
The Basel Committee of banking supervisors, representing most of the world's capital markets, surprised banks on Sunday with concessions on a planned new liquidity rule to enable them to withstand market squeezes.
Banks and some regulators said the original draft, the first of its kind, was too harsh, tying up vast pools of cash at a time when credit is needed to aid struggling economies.
Basel is giving banks an extra four years to comply with the rule by 2019 and include a wider range of risky assets in the buffer.
Regulators defended the change, with Bank of England Governor Mervyn King saying on Sunday that a strong disincentive will be built into the changes.
Banks will have to set aside more capital if they choose to pad out their liquidity buffer with the riskier assets such as bonds backed by home loans, or shares.
Dwight Smith, a partner at the law firm Morrison Foerster in Washington, D.C., also noted that banks will have to sell off assets periodically to test their liquidity, and will face other restrictions on how they can count lower-quality assets in the buffer. "It's not like it's suddenly open season on all this," Smith said.
The change is more significant for European banks than for their U.S. counterparts, many of which already hold large liquidity reserves.
Some former regulators said the rethinking of the liquidity rule is reasonable, pointing out that it was first drafted at a time of public anger over bank bailouts.
Also, policymakers had expected a quicker economic rebound and did not anticipate the depth of the massive euro zone debt crisis, which cast doubt on the solidity of government bonds.
"The draft rule was written in the immediate aftermath of a crisis when there can always be a risk of regulatory overshoot," said David Green, a former Bank of England and UK Financial Services Authority official.
"As circumstances surrounding you change, such as the increasingly visible consequences of constraints on private sector growth or risks related to sovereign debt, then you would be wrong not to adjust," Green said.
Other former regulators weren't so generous in their assessment.
"The way the rules were originally agreed to doesn't work very well, but I think these changes make it worse not better," said Sheila Bair, a former head of the U.S. Federal Deposit Insurance Corp, a bank regulator that provides deposit insurance.
"Like almost everything the Basel Committee does, they're too complex," Bair said.
PLAGUED BY DELAYS
The liquidity rule is part of the Basel III framework that will also force banks to hold up to three times more basic capital than before the crisis.
Only 11 of the G20 countries met this month's deadline for implementing Basel III, with the United States and European Union failing to get their rules in place.
Negotiations on an EU law to implement Basel III resume on Thursday and some lawmakers want to dilute the liquidity rule further than Basel has done by allowing banks to include any asset central banks accept as collateral.
G20 regulation has faced setbacks elsewhere too with the starting date for reforms to make derivatives markets safer passing in December with few changes in force.
There is still no cross-border system for winding down an international bank like Lehman Brothers without taxpayer aid, another core G20 aim of several years standing.
But even some critics of the most recent rollback are not willing to predict the doom of financial reforms meant to make global markets more resilient to shocks.
"I think the resolve on the capital rules is much stronger," said Bair, the former head of the FDIC. "There's always been some discomfort with whether these liquidity rules work or not. But I think the Basel III improvements to capital rules, there's a much higher level of confidence that they are the right thing to do and will work and need to be implemented."
Also, some experts said it is in big banks' best interest to look strong to investors. Market and supervisory pressure has meant that most global banks meet or exceed the Basel levels they must reach by 2019.
"Banks will want to be able to advertise that they are stronger than the regulators need them to be, which leaves those who can't looking like the weaker brethren," said Graham Bishop, a former banker who advises the EU on regulation.