By Huw Jones
LONDON, July 7 (Reuters) - Banks should hold enough cash to ride out a market storm for a month, European Union banking supervisors said on Tuesday in new guidelines that will force the sector to tie up more capital.
Regulators across the world are tightening rules to avoid a repeat of the huge government-backed bailouts of banks.
In recent years, banks have been holding less cash or cash-like assets, known as liquidity, as cheap money was easily available on the wholesale markets.
But when this abruptly dried up in the credit crunch, some banks were left high and dry with Northern Rock in Britain having to be nationalised.
The Committee of European Banking Supervisors (CEBS) published draft guidelines on beefing up liquidity buffers, based on tests banks' business model should undergo.
"A survival period of at least one month should be applied to determine the overall size of the liquidity buffer under the chosen stress scenarios," CEBS said.
"Within this period, a shorter time horizon of at least one week should also be considered to reflect the need for a higher degree of confidence over the very short term," the committee added.
CEBS also laid out the type of assets that could be accepted in a liquidity buffer -- it must be cash or assets that can be turned into cash quickly with a predictable value.
Over-reliance on one type of asset whose rapid sale to raise cash could disrupt the broader market and trigger problems for other banks, should also be avoided, CEBS said.
The committee stopped short of spelling out an absolute figure for liquity buffers as this will vary from bank to bank.
Banks will find it hard to avoid tougher liquidity requirements as the G20 group of industrialised and emerging market countries agreed in April on beefing up rules.
The Basel Committee on Banking Supervision, a global body, is also set to come out with proposals that will increase liquidity requirements from 2010 or later.
Britain is rolling out its own tougher liquidity rules for banks from October, and a draft EU law to increase liquidity is also expected in the autumn.
CEBS will hold a public hearing on Sept. 22 before final adoption of the guidelines it will apply across the EU. (Reporting by Huw Jones, editing by Chris Pizzey)