LONDON, May 13 (Reuters) - Britain's banks should startadjusting their balance sheets to a world where they are nolonger "too big to fail", Bank of England Deputy Governor JonCunliffe said on Tuesday.
Speaking to an event held by Barclays bank,Cunliffe cautioned lenders that once new rules aimed atshielding taxpayers from bank failures are in place, marketswon't return to levels seen in the run up to the 2007-09financial crisis.
"Liquidity premia were likely too low and liquidity riskvery probably under-priced before the crisis," Cunliffe said.
"Market participants will need to recognise this change inmarket structure and adjust their balance sheets accordingly,"Cunliffe added.
One of the rules being finalised to end banks being "too bigto fail" is a requirement to hold a buffer of bonds that can beused to shore up a failing bank once it has burned through allits regulatory capital.
Cunliffe said the aim won't be to resurrect every failedbusiness but only to keep the bank's critical operations goingto avoid harming financial stability.
The BoE's Financial Policy Committee will open a publicconsultation on a possible new power to vary a bank's leverageratio or cap on balance sheets, Cunliffe said. (Reporting by Huw Jones, editing by Jemima Kelly)