Banks could be forced to stockpile £110billion or more of extra government bonds under new rules designed to prevent Northern Rock-style collapses.

The Financial Services Authority wants banks to hold more liquid assets, including easily saleable bonds, at a potential annual cost to the sector of £2.2billion.

Firms are already sitting on nearly £300billion of ultra-safe assets, but the watchdog will demand they increase holdings to insure banks against market seizures like the one that torpedoed the Rock in September 2007.

Banks will alternatively have to show they are reducing their reliance on short-term funding, meaning loans of less than three months' duration.

Stockpiles of highly liquid securities, such as UK gilts, could rise by between £110billion and £370billion, depending on the FSA's final deliberations. The FSA is the first major regulator to spell out tighter liquidity requirements.

Its move could provoke consternation among some lenders - worried that the tougher requirements may make them less internationally competitive and hamper efforts to bolster lending.

But the FSA yesterday insisted it won't put forward final requirements until next year, and even then they will be implemented over 'some years'.

Paul Sharma, the FSA's director of prudential policy, was dismissive of complaints that London's competitive position could be harmed. He said: 'You don't become more competitive by being financially weak.

'We will not start increasing liquidity requirements until the end of the current recession. That means when it is clear that the UK is not going to have a double-dip downturn. During the next boom period these rules will restrain lending, which should mean the next bust will be smaller than it would have been otherwise.'

Economist Richard McGuire of RBC Capital Markets said: 'This possibly long transition period significantly lowers the risk of the regulators reducing the available stock of lending just as the monetary authorities are going to increasingly unconventional lengths to achieve the opposite result.'

Gordon Brown is trying to flog £220billion of extra gilts this year alone. But the drawn- out timetable means the rules are likely to come into effect long after the Prime Minister is expected to have left office.

Source: Daily Mail