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* Lloyds and RBS pass after cutting their balance sheet in2014
* Co-op fails, says will not tap shareholders for morecapital
* Bank of England to test banks' leverage ratio next year
* Stress test focused on emerging market risk possible infuture (Adds Bank of England news conference, updates shares)
By David Milliken and Huw Jones
LONDON, Dec 16 (Reuters) - The Bank of England warnedBritain's banks they should expect a more exacting test nextyear of their defences in the event of a crisis abroad, afterstate-backed lenders narrowly passed a debut check focused onpotential domestic strains.
Lloyds and rival Royal Bank of Scotland scraped through this year's test, proving they could withstandthe regulator's doomsday scenario of plummeting UK house pricesand soaring unemployment, after both took pre-emptive measuresto shrink their balance sheets and raise capital.
Next year's stress test, however, is likely to focus more onrisks from overseas markets. That will mean a harder time forbanks such as HSBC and Standard Chartered,which do much of their business in Asia.
"We can expect that we will look to some of those globalrisks much more closely, they will feature much moreprominently," the governor of the Bank of England Mark Carneytold reporters.
The Bank of England will also examine banks' ability to copewith a sudden liquidity crunch, and will scrutinise leverageratios, which reflects their level of indebtedness.
"There will be no let-up even for those who passed withflying colours," said Neil Williamson, co-head of EMEA creditresearch at Aberdeen Asset Management.
Carney declined to say whether the Bank of England wouldgive state-backed Lloyds approval to resume dividends next yearafter its narrow pass rate in this year's test.
"Any decision about future dividends at Lloyds is first adecision for the board of that institution, but it has to beconsistent with their continuing need to build capital. There isno proposal to adjust the dividend at present," he said.
Investors said both Lloyds and RBS had performed credibly ina test that stimulated a 35 percent collapse in house prices.
"While the passes weren't great, they were passes," saidDavid Moss, head of European equities at F&C Investments. "Thetest was deliberately harsh and what's key is they passed and wecan move forward."
Shares in Lloyds were up 1.3 percent at 1115 GMT while RBSshares were up 0.1 percent.
The Co-operative Bank, which nearly collapsed last yearbefore being bailed out by bondholders, was the only bank tofail the test, with a core capital ratio of minus 2.6 percent.
Co-op Bank said it would sell more loans to reduce itsrisk-weighted assets by another 5.5 billion pounds by the end of2018. It said it was unlikely to make a profit in the next threeyears while it works on its recovery plan.
DEBT BURDENS
Britain decided to introduce annual stress tests for itsbanks in the wake of the 2007-09 financial crisis which requiredtaxpayers to pump 66 billion pounds into RBS and Lloyds.
While the Bank of England said Tuesday's results showed thatthe core of the banking system was now significantly moreresilient, it criticised the banks for failing to give centralbank staff full answers during the tests.
"In a number of instances, the nature of the interactionsfell below the standards set out," the Bank of England said,without identifying which banks it was talking about.
This year's stress tests required banks to have a corecapital ratio of 4.5 percent but from next year, the Bank ofEngland said that it would also assess banks' leverage ratios.
Regulators are increasingly emphasising leverage ratios amidwidespread distrust of banks' own assessment of the riskiness oftheir assets. The leverage ratio removes assets' risk weighting.
Lloyds, RBS and Santander UK had leverage ratiosbelow the current 3 percent requirement under the Bank ofEngland's stressed scenario. Barclays' leverage ratiowas 3 percent under the stress test.
KPMG estimated that if banks had been expected to reach aleverage ratio of 3 percent in this year's tests, then theywould have had to shrink balance sheets by 350 billion pounds.
From 2019 onwards, large UK banks will have to have aleverage ratio of 4.05 percent.
The Bank of England stress test added a number of additionallayers on top of those applied by European regulators in anEU-wide test of 123 banks in October, including a rise ininterest rates to 4 percent from 0.5 percentcurrently.
Under the stress scenario, RBS's core capital ratio fell tojust 4.6 percent, a whisker shy of the 4.5 percent minimumrequired, before actions it had taken this year were taken intoaccount.
Lloyds' core capital ratio was 5.0 percent before itsactions were taken into account.
RBS, which is 80 percent owned by the state, said it wouldsell 2 billion pounds of notes to bolster capital. (Additional reporting by Matt Scuffham, Simon Jessop and SteveSlater; Writing by Carmel Crimmins; Editing by Alexander Smithand Clara Ferreira Marques)
