Bank Watchdogs to Loosen Rules if Europe Tanks: Report

NEW YORK (TheStreet) -- International regulators could ease the liquidity requirements under new international banking capital rules in response to the European crisis, the Wall Street Journal reported, citing people familiar with the matter.

New Basel capital rules designed to make the international financial system safer require banks to hold more capital against risky assets and also step up liquidity in order to deal with cash crunches at the time of crisis.

The rules kick in from next year and will have to be fully implemented by 2019.

European banks have complained in recent months that adhering to the rule might in some cases exacerbate the crisis, as it forces banks to hoard liquidity.

They have also argued that eligible assets that count towards fulfilling that liquidity requirement such as government bonds have actually proven to be volatile and less liquid in light of the European debt crisis, according to the report.

Regulators might look at easing the liquidity requirement by broadening the assets that could count towards liquidity buffers to include gold, corporate bonds and equities, the newspaper said.

Banks might be able to meet these requirements without disrupting their balance sheet too significantly.

Currently most banks are in the process of shedding assets to meet international capital rules, as raising capital in the market has proved next to impossible under adverse market conditions.

-- Written by Shanthi Bharatwaj in New York.