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* Denmark rebuffed over covered bonds
* All EU government debt treated equally
* Recommendations will form basis for draft EU law
By Huw Jones
LONDON, Dec 20 (Reuters) - The European Union's top banks hold on average bigger cash-like buffers than required although some specialised lenders should get some leeway, the bloc's banking watchdog said on Friday.
Banks will have to hold a so-called liquidity buffer made up of top quality assets akin to cash, such as government bonds, that can be sold easily so that lenders can withstand short-term shocks unaided by taxpayers.
The buffer, known as a liquidity coverage ratio or LCR, will be phased in from 2015 with full compliance by 2019.
The European Banking Authority (EBA) said data provided by 357 banks covering about two-thirds of total EU banking assets showed an average LCR of 115 percent, or above what is required.
Some banking models make it easier to comply than others.
"The EBA is, therefore, proposing specific derogations (exceptions) for certain business models under stringent and objective conditions," the watchdog said in a statement.
Such leeway would be given to some consumer and auto finance firms who have no deposits to draw on, while no mainstream bank is expected to get an exemption.
EBA also endorsed the LCR definition agreed at the global level by the Basel Committee, signalling resistance to calls to water it down.
Separately, the watchdog published recommendations on what should constitute two types of assets that can be included in the LCR - "extremely high quality liquid assets" and "high quality liquid assets".
At least 60 percent of the LCR must come from the first category, the rest drawn from the second category.
The EBA said the top category includes all bonds guaranteed by governments and central banks in the EU as well as those from supranational institutions like the European Investment Bank.
The EU bailed out stressed euro zone countries such as Ireland, Portugal and Greece but the EBA said all EU government debt would be treated the same terms despite "some differences in the liquidity features".
Differentiation in supervisory treatment would reinforce fragmentation of the single market and the sovereigns-bank loop, the EBA said.
The latter refers to the so-called "doom loop" between cash-strapped governments and their domestic banks whose balance sheets are stuffed with their bonds.
The EBA said examples of second category of liquid assets include covered bonds, residential mortgage-backed securities (RMBS), corporate bonds, shares and local authority bonds.
Exclusion of covered bonds from the top category disappointed Denmark which has lobbied hard to get its $500 billion mortgage bond market fully accepted.
"It is crucial to Denmark that Danish covered bonds are recognised for what they really are, strongly liquid and great assets," Danish Economic Affairs Minister Margrethe Vestager told Reuters.
The Danish branch of Nordea, the Nordic region's top bank, recently said Danish banks would be forced to scale back their business significantly unless covered bonds are in the top category, though shares in Danish banks traded higher on Friday, shrugging off the news.
Vestager said she has made appointments to meet with EU finance ministers to argue her case.
The EBA said that despite the excellent liquidity features showed by some covered bonds, doubts remain as to their inclusion in the category of extremely HQLA as there was not enough data on how they stood up in times of extreme distress.
Bankers are likely to be dismayed that only securitised debt included in the second category is RMBS, having wanted a wider selection for inclusion.
Securitisation was tarnished in the financial crisis and bankers are looking for official endorsement in order to help coax investors back.
The EU's executive European Commission will use the recommendations to draft a law next year, giving Denmark and others an opportunity to push for changes.