Lehman collapse shapes Bank of England's trading test for lenders

* Trading books of seven lenders to be tested

* Intense selling pressure a major concern

* Tests will gauge resilience for a five-year period

By Huw Jones

LONDON, May 26 (Reuters) - Britain's top banks will betested this year for their ability to cope with the type ofmarket mayhem that followed the collapse of U.S. bank LehmanBrothers in 2008, the Bank of England said on Tuesday.

The specific test for risks from trading books will beapplied to seven banks and will supplement the broader annualstress tests announced in March.

Bank of England Deputy Governor Andrew Bailey, who alsoheads the central bank's Prudential Regulatory Authority, spokelast week of the need to look more closely at markets risks inthe light of recent volatility.

Regulators across the world are casting a nervous eye onbond markets, fearing there could be a stampede for the exit byinvestors when interest rates finally start to move off theirprolonged low levels.

Bouts of extreme volatility in bond markets last autumn andin the Swiss franc this year have also served to focus minds onthe question of whether banks have the capacity to cope withintense selling pressure.

"The Bank's innovations in the 2015 traded risk stress testare inspired by what has happened in real stress events, andespecially in the crisis that followed the Lehman default," theBank of England said in a statement.

Lehman's collapse froze global markets and left other banksunable to sell assets on their trading books to shore up theircapital buffers, triggering painful losses that were ultimatelypassed on to taxpayers in many cases.

The Bank of England said the lenders being tested will haveto judge how long they would take to sell specific assets duringtimes of stress and give estimates of potential losses.

"It should be noted that banks should explain carefully thebasis of the key judgments that they have made," the centralbank said. "Moreover, banks' judgments will be subject torigorous challenge from the Bank."

Trading positions on Feb. 20 this year will be used as thebasis for the test, which will aim to gauge the resilience ofHSBC, Standard Chartered, Barclays,Santander UK, RBS, Lloyds andNationwide Building Society over the next five years.

Trading assets to be tested will include the dollar, euro,sterling, Swiss franc, shares, interest rates, oil, gold andgovernment bonds from Europe, the United States and Asia. (Editing by David Goodman)