BoE's Carney says UK taxpayers still on the hook for bank failures

* UK banks still 'too big to fail', says Carney

* Regulatory changes to take years to have effect

* Carney guarded over end to post-crisis 'bank levy'

By Huw Jones

LONDON, July 14 (Reuters) - Almost seven years after thecollapse of Lehman Brothers sparked mayhem in markets,regulators are still years away from being able to wind down amajor failed bank at no cost to taxpayers, the Bank of Englandsaid on Tuesday.

Lehman's demise in 2008 spawned new rules to make itpossible to let a bank fail without calling on taxpayers orcausing widespread damage to the economy.

"We have many more options in terms of what would happenwere an institution to fail, but I can't sit here today and tellyou that the largest banks are resolvable today," BoE GovernorMark Carney told parliament's Treasury Select Committee.

Only once further regulation takes effect in five years'time will Britain be close to a solution, Carney said.

British banks will have to ring-fence their retail arms withextra capital from 2019, and from 2020 they must hold extrabonds that can written down or 'bailed in' during a crisis.

"It won't be until we have the capital structure fully inplace, the 'bail in-able' debt. There is still work to be done,"Carney said.

The current situation offered big banks a competitiveadvantage, Carney said. Big banks benefit from cheaper fundingthan their smaller rivals because credit rating agencies andmarkets believed governments would bail them out to avoid whathappened with Lehman.

British finance minister George Osborne announced last weekthat he would substantially phase out a levy imposed on banks tomake them pay for taxpayer support during the financial crisis,though a new surcharge on banks' profits will be introduced.

Given that big banks cannot be resolved yet, Carney wasasked if withdrawing the levy was premature.

"I don't think that necessarily it is," Carney replied, in aguarded response. Britain's finance minister George Osborne had"long been aware" of his views about the levy, Carney said.

Carney also told lawmakers that the need to make banksresilient to cyber attacks was a major priority for the FPC.

Britain's five biggest banks have voluntarily completedresiliency tests using a BoE blueprint and the central bankwants 35 financial firms and market operators in total to takethe test, Carney said.

BoE Deputy Governor Jon Cunliffe told lawmakers that iffirms showed any reluctance to using the blueprint then thecentral bank would consider making it mandatory. (Additional reporting by David Milliken)