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By David Milliken and Huw Jones
LONDON, Dec 16 (Reuters) - All Britain's main banks would beable to withstand a sharp fall in house prices, other than thetroubled Co-operative Bank, the Bank of England said on Tuesday.
State-backed RBS and Lloyds only scraped through the BoE'sfirst sector-wide test of the health of major lenders after bothtook pre-emptive measures to shore up their capital defencesbefore the BoE reached its conclusions.
Both banks will need to seek permission from the BoE'sregulatory arm before paying any dividends.
Britain pumped 66 billion pounds into Royal Bank of Scotland and Lloyds Banking Group to keep them afloatduring the financial crisis of 2007 to 2009, prompting ashake-up in the way banks are supervised.
The BoE's Financial Policy Committee, which is tasked withdealing with potential risks to the economy from the bankingsystem, recommended that banks be tested regularly to check theyhave sufficient capital to withstand market shocks.
The FPC said Tuesday's tests showed that Britain's bankingsystem was much safer than just a couple of years ago, and thatno new sector-wide protective measures were needed.
"The results show that the core of the banking system issignificantly more resilient (and) that it has the strength tocontinue to serve the real economy even in a severe stress," BoEGovernor Mark Carney said.
The FPC said it would set additional bank risk buffers whichtake account of the dangers posed by credit booms at zero fornow, but urged banks to improve governance to tackle recentmisconduct and operational failures.
A feared increase in risks from Britain's housing market --which the BoE said in June was the biggest threat -- has so farnot occurred, though household debt remained high.
The BoE stress test adds a number of additional layers ontop of those applied by European regulators in an EU-wide testof 123 banks in October.
The BoE's doomsday scenario features a slump in the value ofsterling and a build up of inflationary pressures, leading to atightening of monetary policy and a rise in interest rates to 4percent from 0.5 percent currently.
Those factors cause the country's economic output to fall byabout 3.5 percent from the end of 2013 and the unemployment rateto almost double to 12 percent.
House prices subsequently fall by 35 percent and commercialproperty prices by 30 percent.
Britain's biggest eight lenders -- Lloyds, RBS, Barclays, HSBC, Santander UK, Nationwide, the Co-op and Standard Chartered -- neededto show they held enough core capital to withstand the scenarioswithout needing extra funds.
The test requires them to have a core capital ratio of atleast 4.5 percent of risk-weighted assets under the scenarios.
Co-op, which nearly collapsed last year and fell under thecontrol of bondholders after a 1.5 billion pound capitalshortfall was identified, had already warned it might fail thetest.
The stress test showed that Co-op's core capital ratio wouldsink to -2.6 percent, even after taking previously announcedmeasures. RBS and Lloyds's ratios would fall to 5.2 percent and5.3 percent respectively.
The BoE said it "would ordinarily have required RBS tosubmit a revised capital plan", but that it deemed thisunnecessary as RBS had announced it would raise extra capitalwhile the stress tests were underway.
Barclays scored 7.5 percent, HSBC 8.7 percent, NationwideBuilding Society 6.7 percent, Santander 7.9 percent and StandardChartered 8.1 percent.
The BoE said that this year's stress test scenario wastougher on banks with high exposures to British mortgages, suchas RBS, Lloyds and Nationwide.
A stress test focused on emerging market shocks -- whichwould affect HSBC and Standard Chartered more -- could come infuture, and the BoE said that in 2015 it would also assessbanks' leverage ratio as well as capital levels in future.
