* Central bank sees fund will be worth 500 mln euros
* Expects fund to be ready by September (Adds bank asscn reaction para 9-10)
NICOSIA, March 28 (Reuters) - Cyprus's central bank will create a financial stability fund worth around 500 million euros to create an additional safety buffer for the island's banks, governor Athanasios Orphanides said on Monday.
"As an initial target, our aim is to build a fund of around 3.0 percent of GDP," Orphanides, a member of the European Central Bank's Governing Council, told lawmakers in parliament.
That figure corresponds to about 500 million euros, he said.
"Our aim is to have this fund ready by September," Orphanides told the finance committee of parliament.
"The creation of a financial stability fund is of primary importance to ensure the credibility of the banking system, irrespective of ... public finances which, as we know, are not in the best of state of late."
In a report last week, ratings agency Moody's estimated that around 2.7 billion euros in capital, some 17 percent of Cyprus's GDP, would be required to restore the Cypriot banking sector's core Tier 1 capital to current levels if the assumptions in their stress tests materialised. [ID:nLDE72K29V]
Moody's cut Cyprus's sovereign bond rating and bank ratings in February, citing delays in structural economic reforms and banks' exposure to debt-laden Greece. Similar reasons were cited for a downgrade by Standard and Poor's late last year, and were also expressed by Fitch, which has placed Cyprus on credit watch for a possible downgrade.
Orphanides said the central bank would be drafting regulations for the operation of the fund. He said it would be built on contributions from banks, but did not provide further detail.
Commercial banks said that, in principle, they did not oppose the creation of a financial stability fund.
"It is however important for our Association to take part in the consultation process for the drafting of any Bill (legislation) in relation to such fund, since we have several core issues as well as other technical provisions we would like to raise," the Association of Cyprus Commercial Banks said.
The fund will run independently of plans by the finance ministry to impose a 0.095 percent levy on financial sector deposits.
That levy is expected to generate an estimated 120 million euros for its two-year validity in 2011 and 2012.
From this accumulated levy, some 50 million euros will be deposited in an account, held by the central bank, which will be transferred to the financial stability fund.
The remainder, 70 million euros, will go to the state, according to draft legislation seen by Reuters.
Initial legislative drafts prepared by the finance ministry had seen 50 million in total going into an ad hoc fund for bank stability, but had failed to take into account that the central bank was working to create its own financial stability fund. New revisions to the levy draft also specify that cooperative credit societies as well as banks will pay the tax, applicable for two years. The levy will not exceed 20 percent of taxable income. (Writing by Michele Kambas, editing by Susan Fenton)