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Looser bank buffer rules no panacea for Europe woes

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* 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".

UNCERTAIN OUTLOOK

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."

U.S., INVESTOR OPPORTUNITIES

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.

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