* EBRD to host Thursday workshop with IMF, banks, regulators
* Fx loans were major reason for E.Europe liquidity crisis
* "Moral suasion" seen as more promising than EU regulation
* Need to create funding for lending in local currencies
By Boris Groendahl
NEW YORK, Dec 2 (Reuters) - Senior central and eastern European bankers and regulators will meet IMF and other officials in London on Thursday to wean the region off its toxic asset of choice: lending in foreign currencies.
The habit of consumers and companies in the former Communist bloc to borrow in hard currencies for everything from TV sets to second homes to harvesters is one of the main reasons the region teetered on the edge of abyss earlier this year.
It helped to build up major current account deficits and currency mismatches, raised the threat of mass defaults, and required interventions by the European Central Bank (ECB) and the Swiss National Bank to avoid a severe liquidity squeeze.
The European Bank for Reconstruction and Development (EBRD) will host a workshop on Thursday, according to five people who were involved in the preparation or will participate, to discuss how to contain fx lending, which is picking up again as the region's economies gradually come out of recession.
The high-level meeting is supposed to come up with ideas on self-imposed rules the region's mostly Western-owned banks and their regulators can implement quickly rather than to design a grand regulatory scheme.
Those rules are likely to include stopping for good some forms of unsecured consumer lending in foreign currencies and stricter conditions on fx mortgages, the sources said.
"What is important is that there is serious thinking about how this vulnerability can be addressed," said one of the sources involved in the meeting which like the others asked for anonymity because the workshop has not been announced publicly.
"It might be a unique opportunity because we are getting out of the systemic risk phase, and this is a time to address systemic vulnerabilities," the source said.
The meeting will also discuss the underlying reasons, such as the lack of funding in local currencies, that make it hard for banks to lend long-term in forint, zloty or leu, rather than in euros or Swiss francs.
Without a market for local currency funding, an fx lending ban could simply cause a credit crunch and squash the fledgling economic recovery. It would need institutions like the EBRD or the IMF to help kick-start this funding, some sources said.
REGULATION VS GUIDANCE
In the aftermath of this spring's near-crisis of eastern European banks, the EU-drafted rules that would restrict fx mortgages by ordering banks to hold more capital against them, in effect making them more expensive.
In a similar vein, Hungary's central bank proposed to limit the leverage allowed for euro mortgages, and to confine them to more affluent borrowers.
But the EU's proposal has lost momentum and may take too long to be enacted, and policymakers are concerned that isolated measures, like those Hungary proposed, may not do the trick.
"If a country like Hungary introduces regulation and it's not coordinated and there is no EU regulation, it can lead to leakages, jurisdiction-shopping and it wouldn't be effective," said the source involved in the meeting.
Austrian regulators, which have bullied their banks into curbing their domestic fx lending with threats of a more heavy-handed approach, are proposing to use this technique of "self-regulation under supervision" in eastern Europe as well.
This self-regulation would include "guidance" on what forms of fx lending are acceptable under which circumstances, and which would be off-limits.
Raiffeisen and UniCredit's Bank Austria arm have already said they are ready to abandon fx lending in areas like consumer finance. But they also say that there is little alternative at the moment for long-term credit like mortgages.
The weak spot of this approach of "moral suasion", however, remains that it relies on banks' self-discipline -- easy to stick to as long as credit demand is weak, but harder when it picks up and more aggressive rivals gain market share.
About 40 people from an informal group now known as "Vienna Iniative" will attend: western bankers active in the region, officials from the IMF, the EBRD, the Bank for International Settlements, the ECB, and from central banks and regulators.
The banks include Italy's UniCredit and Intesa Sanpolo, Austria's Raiffeisen International and Erste Group Bank, Belgium's KBC and France's Societe Generale. (Additional reporting by Balazs Koranyi in Budapest; Editing by Victoria Main) ((boris.groendahl@reuters.com; +43 1 53112-258; Reuters Messaging: boris.groendahl.reuters.com@reuters.net))