Europe to loosen rules for banks repackaging debt

* EU's Barnier says wants to make it easier to securitise debt

* Regulation chief dismisses risk of second "subprime disaster"

* Brussels hopes softening rules can boost money flow

* Small businesses say Barnier plans "weak and vague" (Recasts, adds comment from Barnier)

By Huw Jones and John O'Donnell

LONDON/ BRUSSELS, March 26 (Reuters) - The European Union will loosen rules on selling securitised debt, the bloc's regulatory chief said on Thursday, giving a second chance to products that triggered the worst financial crisis in a generation.

The capital rules that make it expensive for banks and insurers to create and buy such debt will be eased, said Michel Barnier, the European Commissioner in charge of regulation, dismissing any threat that such concessions would risk another "subprime disaster".

Packages of high-risk home loans, rebundled with credit-card and other debt and then stamped as creditworthy, caused billions of euros of losses for banks and triggered the financial crisis of recent years.

Roughly seven years later, the European economy remains in the doldrums, thanks in large part to banks' unwillingness to lend. Banks have historically accounted for two-thirds of corporate funding in Europe, double the level for U.S. peers.

Now policymakers across the region are seeking new streams of credit for industry and believe that securitising or repackaging debt, such as loans to companies, could provide the answer.

"There is the low-quality securitisation. We have seen that it has cost a lot of money, subprime and other examples," Barnier told reporters. "But there is also good securitisation. We want to encourage good securitisation. We are not going to invite a new subprime disaster."

By loosening the rules requiring banks, insurers or pension funds to set aside large amounts of capital to cover risks from investment in securitised debt, Brussels hopes, in part, to tap the trillions of euros that Europeans have saved for retirement.

Barnier said that insurers had 84 trillion euros of assets, while pension funds had 37 trillion euros.

Too little of this money, he said, was invested in 'unlisted infrastructures', a reference to the small and medium-sized companies who would find it easier to borrow if it was possible to repackage and resell their debt.

The European Central Bank is also keen on re-starting securitisation.

European Union banks have shrunk loan books by over $5.5 trillion, more than a tenth, since the global crisis of 2007-08, choking off credit and forcing companies to find alternatives.

"Good securitisation would help us to re-launch financing, which many companies need," said Barnier.

WEAK AND VAGUE

His message is likely get a warm reception from banking lobbyists. Investment banks from Wall Street and London, among others, have long argued that securitisation is one of the few ways to plug the gap left by banks retreating from lending.

Barnier was introducing plans to unlock market-based financing and wean the European economy off its reliance on banks for funding growth and investment in companies and infrastructure.

The EU's small-business lobby, UEAPME, welcomed plans to ease capital rules for banks and insurers on securitised debt. But he slammed Barnier's efforts to improve small-company access to funds, saying they were weak, vague and depended too much on lengthy consultations rather than speedy action.

Brussels' response, although much of its plan will take years to implement, nonetheless marks a fundamental shift in attitude.

Politicians and small firms in countries such as Germany have historically relied on regional banks to provide credit. The formula still works for economically powerful Germany, but the picture is different in Greece or Ireland (Other OTC: IRLD - news) .

"We have to focus on what's going to make a difference, and ... that's securitisation, which includes easing capital requirements on insurers who want to invest in securitisation," said Simon Hills of the British Bankers Association.

"Easing Europe's heavy reliance on funding by banks has to be done reasonably urgently," Hills said. "Otherwise, when the next downturn comes, we will have the same problems with banks deleveraging."

There are other elements to Barnier's plan. Alongside easing the rules on what pension funds can invest in, Barnier will try to nurture new forms of finance, such as crowdfunding or online peer-to-peer lending.

Such schemes, he hopes, can boost growth and help to create jobs. Addressing the issue of jobs and how fresh finance can create them will also help Brussels' image ahead of elections for the European Parliament in May.

"The trigger for employment and growth is financing," said Barnier. (Reporting by Huw Jones; Editing by Larry King)