LONDON, Nov 28 (Reuters) - Regulators should complete work on new their bank capital rules without diluting them otherwise it would be harder to draw a line under the financial crisis, a global central banking official said on Monday.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, a forum for central banks, said the balance sheets of some lenders have still not been wiped clean of bad loans nearly a decade after the financial crisis began.
That crisis prompted world leaders to introduce tougher bank capital requirements, known as Basel III, which regulators will seek to complete at a meeting on Monday and Tuesday in Chile.
The remaining elements of Basel III face stiff opposition from European Union policymakers, concerned they will bump up capital requirements and crimp lending.
"For their part, prudential authorities should complete the financial reforms without delay, notably Basel III," Borio told a meeting of the EU's European Banking Authority on Monday.
"And in the process, they should not succumb to the pressure to dilute standards and should redouble efforts to repair balance sheets," Borio added.
Research from the BIS showed that lending growth was higher for banks with higher capital ratios, Borio said.
Borio said this widespread scepticism about banks' health, as reflected in their valuations, has lead to rapid growth in market-based financing, with asset managers growing in leaps and bounds.
"That said, probably the most important reason for the current woes has been a policy response that has failed to induce sufficient adjustment," Borio said.
He singled out Italy where banks hold about 330 billion euros ($350 billion) in troubled loans, equivalent to a fifth of the country's economic output.
"Within this general picture, at least one banking system in Europe, Italy's, has been facing serious strains, handicapped by a crippling pile of bad debt," Borio said.
Monte dei Paschi is trying to raise five billion euros to bolster its capital buffers.
Regulators have put in place new rules to avoid taxpayers having to bail out failing lenders, but Borio said it would be imprudent to assume that these rules are foolproof.
"And when establishing a balance between private sector and public sector involvement in addressing systemic crises, it is essential to bear in mind that public sector support may be necessary," Borio said.
$1 = 0.9388 euros Reporting by Huw Jones, editing by Louise Heavens