* Basel agreement seen giving banks more capacity to lend
* But weak economy weighs on credit demand
* Uncertain outlook also means banks nervous about lending
* Rules changes may have bigger impact in U.S. than Europe
By Paul Carrel and Marc Jones
FRANKFURT/LONDON, Jan 7 (Reuters) - A move by global regulators to give banks more time and flexibility to build up cash reserves will do little to support a recovery in Europe, where recession-hit companies and households have scant appetite for more debt.
In the United States, where economic recovery already appears to be underway, the impact may be more significant due to a bigger market for mortgage-backed securities which, if revived, could lend support to the housing market.
The Basel Committee agreed on Sunday to give banks four more years to build up cash buffers against future shocks like the 2008/09 financial crisis, and to widen the range of assets they can use to include shares and residential mortgage-backed securities, as well as lower-rated company bonds.
This pull-back from an earlier draft of global liquidity rules, which aim to help prevent another banking crisis, means lenders will in theory have more scope to use some of their reserves to help struggling economies grow.
But in the euro zone, where the European Central Bank's own forecasts suggest the economy will shrink 0.3 percent this year, freeing up banks' capacity to lend cannot make up for a dearth of demand from uncertain businesses and consumers.
"Overall it is positive, but I don't think it is enough to turn around the whole situation in the short-run," Berenberg Bank economist Christian Schulz said of the Basel rules change.
"Once the (economic) rebound actually starts, I think this is going to amplify it a little," added Schulz, who put the effect on growth in the 17-country euro zone at no more than 0.1-0.2 percentage points of annual gross domestic product (GDP).
A spokeswoman for Raiffeisen Bank International said: "This is a positive signal by the Basel Committee." However, she stopped short of saying it would fuel extra lending.
Bank Austria, the UniCredit unit that is emerging Europe's biggest lender, said the changes "will make it easier in future to lend to companies than the originally planned rules did".
The regulators' change of tack at least offers the prospect of supporting lending to households and businesses - an area where the ECB has struggled to have an impact.
The ECB channelled more than 1 trillion euros in cheap, 3-year loans to banks in late 2011 and early 2012. The central bank says this averted a major credit crunch but demand remains the real problem.
"To a large extent, subdued loan dynamics reflect the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand," ECB President Mario Draghi said in his statement after the bank's December policy meeting.
The ECB's last quarterly Bank Lending Survey showed that euro zone banks made it harder for firms to borrow in the third quarter and expected to toughen loan requirements further, even though their own funding constraints eased.
By far the most important reason banks cited for tightening credit standards for firms was the economic outlook. Reduced investments were the main reason for lower corporate loans demand.
The picture was similar for household loans, with the economic outlook cited as the main reason for tightening credit standards, followed by housing market prospects.
Howard Archer, economist at Global Insight, saw little effect on Europe's economy from the looser bank buffer rules.
"This may increase banks' ability to lend but whether their willingness to lend increases that much, I am dubious because of the economic environment," he said. "At the same time, I think demand for credit will remain pretty muted overall as well."
The decision to include residential mortgage-backed securities in the assets banks can put into the cash buffer - even if at a hefty discount to their value - should help banks in the United States and stimulate the U.S. securitisation market.
"This should, at the margin, favour U.S. banks relative to European banks, because the use of these assets is much less common in most European countries than it is in the United States," said Tobias Blattner, economist at Daiwa Europe.
Any fresh support to the U.S. economy - where employers added 155,000 jobs last month and factory activity rebounded - could help it to accelerate further away from Europe.
The United States, China and much of the developing world have already decoupled from Europe, leaving it to wallow in various stages of recession and fiscal disarray.
From an investor point of view, the cash buffer changes could increase the attractiveness of the bank debt, asset-backed securities and other types of assets now included in the rules.
Under the original draft, emphasis was almost exclusively on holding sovereign debt but the changes mean some corporate debt rated as low as BBB-, a range of easy-to-sell shares and double-A rated residential mortgage-backed securities can also be used.
The iTraxx senior financial index, which measures the risk of a default on bank debt, saw spreads narrow from 125 to 121.5 basis points on Monday, a sign that investors see the changes as potentially beneficial for bank debt.
"Credit spreads are a bit tighter," said one credit market trader. "But it (the index) has had a very big performance since the start of the year, so perhaps that has limited the impact we have seen."
There are other restricting factors. Deductions, known as haircuts, will be taken from the assets' value to ensure they provide adequate protection even if their value drops. Combined they will be allowed to account for only 15 percent of what a bank must hold.
With a broader menu of assets now available, analysts said the rules changes could ease demand for sovereign bonds. There was no sign of an immediate market reaction on Monday but strategists mulled a longer-term shift.
"From a big picture perspective, these revisions are potentially negative for sovereign debt in so much as they reduce banks' imperative to hold government bonds," said analysts at Rabobank, adding that the changes could boost demand for corporate debt.