UPDATE 1-BoE's Cunliffe tells banks to prepare for post-"too big to fail" world

* BoE says still work to do on "too big to fail" banks

* BoE to hold public consultation on leverage ratio (Adds more detail, background)

By Huw Jones

LONDON, May 13 (Reuters) - Britain's banks need to startpreparing for a financial environment in which they are nolonger "too big to fail", Bank of England Deputy Governor JonCunliffe said on Tuesday.

Taxpayers in Britain poured 65 billion pounds into banksduring the 2007-09 financial crisis and the BoE wants to ensurethat no bank is so big that letting it fail would risk themarket mayhem seen when Lehman Brothers went bust in September2008.

Speaking at an event held by Barclays bank,Cunliffe cautioned lenders that once new rules are in place toensure that no bank is too big to fail, market liquidity won'treturn to levels seen in the run-up to the financial crisis.

"Liquidity premia were likely too low and liquidity riskvery probably under-priced before the crisis," Cunliffe said.

"Market participants will need to recognise this change inmarket structure and adjust their balance sheets accordingly,"Cunliffe added.

One of the rules being finalised is a requirement to hold abuffer of bonds that can be used to shore up a failing bank onceit has burned through all its regulatory capital.

But Cunliffe said the aim won't be to resurrect every failedbusiness such as by arranging "hasty shotgun weddings" or forcedtakeovers.

The amount of "bail-in" bonds that banks will be required tohold will only be enough to keep critical operations such aspayment systems going to avoid harming financial stability,while the group can be safely wound down over time.

"We are not seeking an amount of 'Gone ConcernLoss-Absorbing Capacity' capable of resurrecting any failingbanks including the global giants," Cunliffe said.

Cunliffe's boss, Bank of England Governor Mark Carney, whois also chairman of the G20 economies' Financial StabilityBoard, said in March that the board wants to crack "too big tofail" bank barriers by Christmas.

LEVERAGE RATIO

Another global rule being finalised is the leverage ratio,which acts as a cap on a bank's balance sheet.

A preliminary ratio of 3 percent was set and globalregulators will decide in 2017 what the final minimum levelshould be, though countries like the United States are alreadymoving to a much higher requirement.

Some bankers expect Britain's lenders will be required tohave a leverage ratio of 4 percent or above regardless of what'sdecided at the global level.

The government has asked the BoE's Financial PolicyCommittee to review if the global leverage rule should beintroduced earlier in Britain.

Cunliffe said the Bank will hold a public consultation onthis and on a possible new power to vary a bank's leverageratio.

Regulators are putting pressure on the swaps industry torevise trillions of dollars of contracts by inserting a clausethat allows for such contracts being temporarily prevented frombeing closed out while a bank is being wound down.

The industry says that big investors or "buy side" playershave legal difficulties with this. But Cunliffe signalled thatregulators won't be deterred.

"The way forward will likely entail the major dealers, the'sell side', who together account for around 80 percent ofcontracts in the market, moving first," Cunliffe said.

Ensuring that no lender is 'too big to fail' is not onlyseen as crucial to shielding taxpayers but also to restoringtrust among regulators after the collapse of Lehman Brotherssoured relations, leading to unilateral national measures oncapital rather than global coordination. (Reporting by Huw Jones; Editing by Jemima Kelly and HughLawson)