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* US raises leverage ratio bar with 6 pct target
* UK, Swiss also "gold-plate" global leverage rules
* Deutsche Bank, European banks seen hardest hit
* Dividends, liquidity buffers, bond trading may be hit
By Steve Slater
LONDON, July 12 (Reuters) - New demands from regulators toforce banks to keep a lid on risk-taking after the financialcrisis have re-ignited a debate over how best to strengthen theindustry without stifling lending or alienating investors.
Bank regulators in the United States this week set out plansto impose a leverage ratio on banks that caps their lendingbased on a simple assessment of their equity. Britain andSwitzerland have also demanded their banks "gold-plate" a globalrule for this leverage cap or ratio.
Until now, regulators had focused mainly on getting banks tohold more capital and liquidity to prevent a repeat of thetaxpayer bailouts of the industry during the 2007/2009 crisis.
Now excessive leverage is their sights because the capitalrules rely on banks' own assessments of the riskiness of theirlending. And regulators are worried that banks may be gaming thesystem.
"The leverage ratio has come up the pecking order and couldnow be a big constraint on the banks," said Chris Wheeler,analyst at Mediobanca in London. "Inevitably it was going to bethe next shoe to drop, and the question is how far it is pushedby the regulators."
Supporters of the leverage rules say it is a welcome returnto a simple a measure, which is harder for banks to manipulate.
Critics say the leverage ratio is too blunt a measure ofdanger and should be just a backstop to more complex risk-basedcapital requirements.
Deutsche Bank finance chief Stefan Krause said the leverageratio was too simplistic. "We can't call for a return tohorse-drawn carriages every time an automobile component doesn'tfunction properly," he said in an interview with Germannewspaper Boersen-Zeitung.
Analysts reckon most banks should be able to meet the newleverage rules without having to turn to investors for morecash, something many banks have done to meet the capital regime.
But they may take steps to reduce the impact, and couldshrink the liquidity buffers they have been encouraged to buildup, shift assets to other parts of their group, shorten theduration of derivatives contracts or cut repo activity.
They could also pull back in government bond trading, ashigh volume, low-risk and low-margin businesses become morecostly. Or they could simply cut back on lending.
Regulators say banks hit by the leverage requirements haveother options: cut or delay dividends or reduce pay for staff.
"Leverage is clearly a major issue for banks' investors -credit and equity," Huw van Steenis, analyst at Morgan Stanley,said in a note. "For a number of EU banks the leverage ratiowill increasingly become the governing constraint."
EUROPE HIT HARDEST
The Bank of England has told Barclays and mutualmortgage lender Nationwide, the only British banks to growlending in the first quarter, they are not allowed to cutlending to meet the leverage ratio goal.
The Bank defended its sudden introduction of a leveragetarget as an extra lever because some banks had shown "quite abit of slippage" on their plans to strengthen capital.
"I am not a one club man," said Andrew Bailey, its head ofbanking regulation, referring to the need for a dual approach.
Europe's banks are seen as the most heavily impacted by thetougher rules, as they have been slower to build up capital.
The leverage ratio measures the amount of equity (capital) abank holds as a percentage of its assets (loans), withoutadjustments for risk.
Deutsche Bank has a leverage ratio of 2.1 percent, UBS and Credit Suisse stand at about 2.2 percent(excluding contingent capital) and Barclays is at 2.8percent, compared to an average of 3.7-4 percent at the big U.S.banks, according to analysts at Morgan Stanley.
The proposals could leave Deutsche Bank's U.S. subsidiarywith a capital shortfall of 17 billion euros ($22.17 billion),analysts at Espirito Santo estimated.
But differences around methodologies and timing make it hardto gauge how close banks are to meeting the targets. It is alsotough to predict how much they will need to do to get there.
Barclays, for example, could need 7 billion pounds of extracapital to meet UK demands. But using Canada's leverage regime,its ratio would be as strong as Canada's major banks, consideredsome of the safest in the world, Morgan Stanley estimated.
Deutsche Bank's needs may hinge on the main unresolved issueof whether leverage calculates derivatives holdings on a"netted" or gross basis. U.S. accounting rules allow forcalculations of net positions but international standardsrequire gross positions, which can be much larger.
At Deutsche, it could be the difference between having 2trillion euros in assets or 1.2 trillion, which has a hugeimpact on the ratio. Deutsche pointed to Krause's comments whenasked about its views on the ratio impact.
At a global level, regulators are attempting to harmonisethe rules. But bankers and analysts do not expect clarity anytime soon. "The real challenge is going to be to get someconsistency," Mediobanca's Wheeler said.
