Bank of England's King makes last call for more stimulus, bank reform

* BoE's King says UK recovery not secure, more QE needed

* Banks need more capital, must regain public trust -King

* King speaks as Osborne outlines bank reform plan

By David Milliken

LONDON, June 19 (Reuters) - Britain's economic recovery isnot yet secure and more needs to be done to ensure the country'sbanks no longer pose a threat to taxpayers, Bank of EnglandGovernor Mervyn King said in his final speech on Wednesday.

King steps down at the end of this month after more than 20years at the bank, to be replaced by former Canadian centralbank chief Mark Carney, and the 65-year-old stuck to familiarthemes in an annual address to London's financial elite.

"There is a powerful case for more stimulus in the shortrun," said King, who has spent the last five months at the helmof the BoE's Monetary Policy Committee as part of a dissentingminority calling for a new round of asset purchases.

"A recovery in the UK, albeit modest, is underway ... (but)growth is not yet strong enough to reduce the considerablemargin of spare capacity in the economy. Nor is recovery at anadequate rate fully assured."

While Carney has been hired by finance minister GeorgeOsborne with a brief to find new ways for the BoE to boostBritain's economy, his appetite for asset purchases is lessclear, and economists think there may be no more this year.

But King said unnecessarily high unemployment was now abigger threat to Britons' well-being than inflation - which hasexceeded the BoE's 2 percent target for most of the past fiveyears - and that euro zone weakness and a troubled bankingsystem remained the main obstacles to growth.

While global market interest rates had risen in recent weeksdue to uncertainty about the U.S. Federal Reserve's future bondpurchases, the world economy was too unhealthy to talk of ratesreturning to normal pre-crisis levels anytime soon, King added.

"Bond yields have risen. But such market moves should not beconfused with a return to normality," he said.

BANKING ON REFORM

King was speaking just after Osborne told the same audienceat Mansion House, the Lord Mayor of London's ornate officialresidence, about his plans to shake up Britain's twostate-controlled banks.

King said he welcomed Osborne's plans to sell thegovernment's 39 percent stake in Lloyds Banking Group and consider restructuring Royal Bank of Scotland - astep he has previously said should have been taken years ago.

But more needed to be done. On Thursday the central bank'sregulatory arm will publish details of how much new capitalBritain's banks need to raise, with media reports suggestingthat Lloyds, RBS and Barclays will bear the brunt.

"There is clearly some way to go before we can claim to havea really well-capitalised banking system," King said, rejectingsome banks' view that higher capital requirements are acting asa brake on their ability to support the economy.

A longer-term problem was the size of some British banks,which are still too large and complex to be able to collapsewithout causing financial chaos, King said.

"We must restore trust in our banking system," he said. "It is not in our national interest to have banks that are toobig to fail, too big to jail, or simply too big. Solving theseproblems is the work of a generation."

Earlier on Wednesday, British legislators called for laws toimprison "reckless" bankers in a report welcomed by King, whohas often criticised the culture in banking.

King's speech focused on future challenges, and not the maincriticism laid against him: that he paid insufficient attentionto bank stability before the financial crisis.

He also wished his successor well. "The Bank of England isin safe hands, and the country will be the better for it."