UPDATE 1-Bank of England says bank capital levels "not in the wrong ballpark"

(Adds more comments from Bank of England official)

By Huw Jones

LONDON, Oct 30 (Reuters) - This year's stress tests ofBritain's major banks will not become an excuse for regulatorsto ratchet up capital requirements without justification, asenior Bank of England official said on Friday.

The annual stress tests are designed to check banks haveenough reserves to cope with future financial shocks so theywill not need to be rescued using taxpayers money.

Alex Brazier, executive director for financial stabilitystrategy and a member of the Bank of England's Financial PolicyCommittee risk watchdog, said the central bank was mindful ofhow setting capital requirements had real economic consequences.

"It is incumbent on us not simply to ratchet up, or down,the severity of the stress scenario over time," Brazier told aconference on bank stress testing at the London School ofEconomics.

"As policymakers, we have a responsibility to ensure thatcapital requirements change only because the risks change,"Brazier said.

"The side of the bed we exited on the morning of decidingthe scenario should not feature in that dataset. It hasn'tbefore. And this approach ensures it won't in future."

His comments are the latest to suggest a shift in tonetowards the banks as the government is keen to move on from thefinancial crisis to a more accommodative "new settlement" withthe industry.

Brazier is the third senior Bank of England official in thepast two weeks to have sought to reassure banks they are holdingenough capital.

Bank of England Deputy Governors Andrew Bailey and JonCunliffe have spoken in similar terms. They have emphasised howstrides in making banks "resolvable" - meaning they can moreeasily be wound down without causing market mayhem - mean largeincreases in capital from current levels will not be needed, orare desirable.

The big banks will have to issue so-called bail-inable bondsthat can be written down to replenish core capital if needed,without calling on taxpayers for cash.

Brazier said this meant capital levels under existing andplanned rules were therefore "not in the wrong ballpark."

Holding very high capital ratios all the time has itssupporters among regulators, but would not make macroeconomicsense, he said.

The Bank of England is changing the stress tests from nextyear to tailor them to the economic cycle, so banks will have tobuild up extra buffers in good times so they can be used ifthere is a downturn.

Thomas Huertas, a former UK bank regulator who is now aconsultant at EY, asked Brazier how banks could continue payingdividends under such a regime.

"The answer is make money and don't take risks thatmaterialise," Brazier replied. "No, we are not turning bankinginto utility but a sensibly regulated industry."

Others attending the conference asked him how the Bank ofEngland could determine accurately where in the business cycle atest was taking place. Brazier said the new-style test was aboutmoving capital buffers in line with risks and not making the(economic) cycle flat.

The results of the Bank of England's stress tests of HSBC, RBS, Lloyds, Barclays,Santander UK, Standard Chartered andNationwide Building Society are due on Dec. 1. (Editing by David Holmes and Jane Merriman)