* Banks say government should consider sunset clause and cap
* Bank body says levy is damaging UK financial servicesindustry
* Banks want end to uncertainty over duration of tax
* Levy was increased in March and was in election manifesto
By Matt Scuffham
LONDON, July 6 (Reuters) - Britain's banks have called uponthe government to phase out the bank levy, saying it is damagingthe competitiveness of the industry and causing them to losebusiness to overseas rivals.
The levy was initially introduced in 2011 not only to raisemoney but also to discourage banks from risky borrowing,replacing a previous one-off tax on bankers' bonuses by theLabour government following the 2007-9 financial crisis.
Its emphasis has changed to focus on generating revenue withBritain's finance minister George Osborne saying in March banksneeded to make a greater contribution to repair the country'sfinances.
Osborne increased the levy in March to 0.21 percent of abank's assets from 0.16 percent previously. That lifted theamount the government aims to raise from the tax to 3.4 billionpounds ($5.3 billion) a year from 2.5 billion.
Anthony Browne, chief executive of the British BankersAssociation, said in a letter to Osborne on June 23 that thegovernment should consider ways of reforming the tax.
"Proposals to consider could include the levy to be cappedin terms of its rate and a sunset clause introduced so thatbanks can begin to plan for a future without the levy," he said.
The Chancellor will outline his economic plans in anemergency budget on Wednesday following May's general election.The Treasury would not comment on whether he will address theissue of the levy, which was a pledge in the Conservativeparty's election manifesto.
Europe's biggest bank HSBC has said the levy willbe a factor in whether it decides to keep its headquarters inthe UK. It plans to make a decision this year.
"The levy is already causing damage," Browne said in hisletter to Osborne. "For example, activities are being bookedoutside London and marginal investment decisions are seeingactivity placed outside the UK."
Browne said banks wanted more certainty around the issue andassurance that banks were part of broader plans to make sure theUK remained competitive on taxation.
"This is important not only from the perspective of thelocation of international banking and capital marketsactivities, but also in terms of impacting upon the provision ofcredit to the domestic economy," he said.
Osborne struck what some bankers believed to be aconciliatory tone in his annual speech to bankers in the City ofLondon last month, saying he wanted Britain to be the best placefor global banks to be headquartered and talking of a "newsettlement" for the industry.
Other suggestions for reform of the levy have included thepossibility of making it a tax on UK banking assets only, whichwould mean those with a high proportion of overseas assets, suchas HSBC and Standard Chartered, would not be unfairlypenalised.($1 = 0.6402 pounds) (Reporting by Matt Scuffham; Editing by Elaine Hardcastle)