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* Prudential Regulation Authority sets new curbs on sector
* Finds end-2012 aggregate capital shortfall of 27 bln stg
* Findings apply to RBS, Lloyds, Barclays, Co-op, Nationwide
* Five have already outlined plans to cut gap by 13.7 bln
By Matt Scuffham and Huw Jones
LONDON, June 20 (Reuters) - Britain's banks will have toraise 13 billion pounds ($20.4 billion) of extra capital andmeet a new cap on lending ahead of international peers as theBank of England seeks to curb risk in the financial sector.
The combined balance sheet of Britain's largest banks isfive times the size of the economy, despite radicalrestructuring since the crash in 2008, and the country's centralbank fears some of them are still too big to fail.
Privately bankers complain that higher capital requirementsand limits on leverage are hampering their ability to lend, butoutgoing Bank of England governor Mervyn King told London'sfinancial elite this week it was wrong to blame higher capitallevels for weak lending.
Some analysts however said there was merit to theircomplaints. "It's that continuing theme - putting pressure onbanks to build up more reserves ... and, on the other hand, turnaround and say they've got to lend more," said Chris Williamson,chief economist at Markit.
"This is simply going to add to pressure on banks toscrutinize ever more carefully their lending," Williamson said.
The Prudential Regulation Authority (PRA), the Bank ofEngland's new banking regulator, said on Thursday there was anaggregate capital shortfall of 27 billion pounds at the end oflast year at Royal Bank of Scotland (RBS), LloydsBanking Group, Barclays, Co-operative Bank and Nationwide Building Society.
The five have already outlined plans to bring the gap downby 13.7 billion pounds and the rest will be raised viadisposals, restructurings and retained earnings.
Part-nationalised RBS accounted for just over half of theshortfall, some 13.6 billion pounds, underscoring the challengefacing Prime Minister David Cameron as he seeks to sell down thestate's 81 percent stake in the bank.
Lloyds had an 8.6 billion shortfall but has announced plansto raise 5.8 billion and said it expects to meet the additionalrequirement without needing to issue hybrid debt or shares.
While the government is ready to start selling its 39percent stake in Lloyds, Finance Minister George Osborne hasadmitted a sale of the RBS shares was a long way off. He said hewould review the possibility of splitting RBS, putting its toxicproperty loans into a so-called "bad bank".
Many people, including Osborne, have said previously creating a bad bank for RBS would be too costly.
RECKLESS BEHAVIOUR
Britain is determined to avoid a repeat of the 2007-09financial crisis, with King, in his last major address toLondon's financial elite late on Wednesday, describing purgingthe City of London of overly large banks and reckless bankers as"the work of a generation".
During the boom, bankers attending the annual banquet inLondon's Mansion House were toasted for their work, but thisyear, in the wake of a global scandal over interest rate riggingcentred on the benchmark London Interbank Offered Rate (Libor),they were warned they risked jail for reckless behaviour.
Former UBS and Citigroup trader Tom Hayesappeared in court on Thursday accused of conspiracy to defraudin connection with the Libor scandal.
While Euro zone countries are trying to forge a bankingunion overseen by the European Central Bank to help shieldtaxpayers from future crises, Britain is imposing some of thestrictest rules on risk to help insulate its citizens.
Britain's banks will have to meet a core Tier One capitalratio of 7 percent by the end of this year, compared with aglobal deadline of 2019, and King said they would face regularstress tests, starting next year.
In Europe, only Switzerland has a tougher regime, requiringits banks to have a core Tier One ratio of 10 percent by 2019.The Swiss government said on Thursday it would demand banks holdadditional capital against their mortgage books.
The Bank of England has also set a "leverage ratio" of 3percent for UK banks with immediate effect, four and a halfyears before it is due to be implemented globally.
The leverage ratio measures capital against total loans, notadjusted for their supposed riskiness, and some bankers argue itpenalises low-risk, high-volume businesses like trade financeand mortgage lending, crucial to economic growth.
The PRA said Barclays and Nationwide fell short of therequired level, with leverage ratios of 2.5 percent and 2percent respectively after adjustments. It said they must submitplans by the end of this month to reduce leverage.
Barclays and Nationwide were the only two whose net UKlending was more than 1 billion pounds in the first quarter. Barclays said its restructuring plans include a reduction inleverage "over time".
