What first appears as a victory for banks in their battle to dilute draconian rules on liquidity will still mean they have to find trillions of dollars to protect themselves against their funds running out.

Heavy lobbying by banks over the past two years has bought them time but they will still have to lock up big new cash buffers globally from 2015.

The Basel Committee of banking supervisors, representing most of the world's capital markets, surprised banks on Sunday with concessions on a planned new liquidity rule so they can withstand market squeezes.

Banks and some regulators said the original draft, the first of its kind, was too draconian, tying up vast pools of liquidity at a time when credit is needed to aid struggling economies.

Most analysts saw the changes as a reflection of economic reality though one former Fed official said delaying and diluting the rule will increase risks from banks.

"Per usual, it will be the taxpayers picking up the tab when a wrong-way bet by a 'too big to fail' bank turns sour," said Cornelius Hurley, a director at Boston University's centre for finance and former counsel to the Fed.

Basel is giving banks an extra four years to comply with the rule by 2019 and include a wider range of risky assets in the buffer but Bank of England Governor Mervyn King said on Sunday a strong disincentive will be built into the changes.

Banks will have to set aside more capital if they choose to pad out their liquidity buffer with the riskier assets such as bonds backed by home loans, or shares.

The rule was first drafted amid a mood of public anger when taxpayers were forced to shore up banks in response to the financial crisis of 2007-2009.

Economists had also expected growth to rebound by now so banks would find the cash and capital needed to comply with new rules. But they and the regulators did not expect a massive euro zone debt crisis that also cast doubt on the solidity of government bonds.

"The draft rule was written in the immediate aftermath of a crisis when there can always be a risk of regulatory overshoot," said David Green, a former Bank of England and UK Financial Services Authority official.

"As circumstances surrounding you change, such as the increasingly visible consequences of constraints on private sector growth or risks related to sovereign debt, then you would be wrong not to adjust," Green said.

The liquidity rule is experimental in some ways, seeking to plug a gap that left banks such as Northern Rock in Britain with too little cash as a result of the credit crunch that emerged in 2007, forcing taxpayers to foot the bill.

It is part of the Basel III framework approved by world leaders in 2010 that also forces banks from this month to hold up to three times more basic capital than before the crisis.

Only 11 of the G20 countries met this month's deadline for implementing Basel III, with the United States and European Union failing to get their rules in place.

Negotiations on an EU law to implement Basel III resume on Thursday and some lawmakers want to dilute the liquidity rule further than Basel has done by allowing banks to include any asset central banks accept as collateral.

Sharon Bowles, the UK Liberal Democrat chair of the European Parliament's economic affairs committee, welcomed a wider range of assets in the buffer - up to a point.

"With regard to assets that qualify as central bank eligible assets it would clearly be wrong to frame that so widely that we ended up with 'anything goes' under emergency or special treatment rules," Bowles said.

MARKETS GET THEIR WAY

The G20 and Basel Committee have no powers to enforce regulatory rules beyond public naming and shaming.

G20 regulation has faced setbacks elsewhere too with the starting date for reforms to make derivatives markets safer passing in December with few changes in force.

There is still no cross-border system for winding down an international bank like Lehman Brothers without taxpayer aid, another core G20 aim of several years standing.

But analysts question whether the delays and concessions matter that much as investors become pickier and financial firms move early to exploit tougher derivatives rules.

Banks lobbied hard against the Basel rules that will force them to hold more capital, up to 9.5 percent in the core mandatory buffers for the world's top 28 lenders by 2019.

But market and supervisory pressure has meant that most big banks meet or exceed the Basel levels they must reach by 2019.

"It will be the same for liquidity and banks will want to be able to advertise that they are stronger than the regulators need them to be, which leaves those who can't looking like the weaker brethren," said Graham Bishop, a former banker who advises the EU on regulation.

A European regulatory source welcomed Basel's more holistic approach to the liquidity rule given that banks must comply with many other costly rules as well.

"We really need to assess the global constraints related to all the new requirements before adding any layer on top and until now, that was done segment by segment in a piecemeal manner," the regulatory source said.

There is also a worry among regulators, learning on the hoof with new types of rules, that piling many rules on banks too quickly could push risky activities into the hands of "shadow banks" which have yet to be supervised properly.

"You can see all this as a matter of judgment and testing of a new rule as you go along," Green said.

Rethinking the liquidity rule may not be the last time that regulators will have to make concessions.

A raft of changes to make derivatives safer relies heavily on there being several trillion dollars of extra top quality collateral to back trades, a quantity experts say is simply not readily available.

(Reporting by Huw Jones; Editing by Giles Elgood)