UPDATE 1-Britain rejects call to stiffen bank leverage rules

* Ratio of 3 pct not strict enough - lawmakers

* Tougher rules to be reviewed in 2017

* Government rejects call for full break-up

* Parliament debates Banking Reform bill

By Matt Scuffham and Steve Slater

LONDON, March 11 (Reuters) - Britain will resist calls toimpose far stricter rules on how much banks can leverage theircapital for investments and lending, insisting that there is noneed to do so before 2018.

The government is forcing banks to limit leverage to 33times their capital, in line with international regulations, andrejected a call on Monday from a panel of UK lawmakers tostiffen the rules to curb risk-taking even more.

"Our view is that at this time we should follow theinternational approach, to press for countries to have a powerto set a higher ratio for 2018 following a review in 2017," saidGreg Clark, Britain's Financial Secretary to the Treasury.

The head of the Parliamentary Commission on BankingStandards (PCBS), which has been asked to find ways to reformbanks, said he was disappointed that the government did notconsider a tougher rule and that current proposals to change theindustry fall short of what is required.

"There remains much more work to be done to improve thebill," Conservative MP Andrew Tyrie said.

Tyrie had also called on the government to adopt legislationthat could force the full break up of banks' routine retailoperations and riskier investment banking arms if new rulesdesigned to protect taxpayers fail.

But Clark rejected that proposal, too.

The government will instead force banks to "ring-fence" theretail operations. This would keep the two business segmentswithin a bank's overall control but protect the retail side fromrisks in other areas.

"If a future government considered that ring-fencing was nolonger the right solution, then it should consider a fullanalysis for further reforms, and in the light of that analysisbring forward new legislation," Clark said.

ELECTRIFIED RING-FENCING

The government has said it supports a proposal by Tyrie to"electrify" the ring-fence, meaning that any individual bankthat tried to find a way around the new rules could be broken upby the regulator.

Clark was speaking as he delivered the Banking Reform Billto parliament. The bill is aimed at preventing a repeat of theneed for taxpayer-funded bank bailouts after the 65 billionpound ($97 billion) double rescue of Royal Bank of Scotland and Lloyds Banking Group in 2008.

He said the challenge was to safeguard the banking industrywithout imposing excessive costs.

"The system of regulation failed, as did the culture of thebanking sector in not preventing or resolving the crisis withoutrecourse to taxpayer money. That is why fundamental reform isneeded," Clark said.

Recent problems across Britain's banks - including interestrate rigging at Barclays and RBS, mis-selling scandalsand accusations of an over-aggressive banking culture - haveadded to calls for Britain to take a lead with financialindustry reform.

Mervyn King, the outgoing Governor of the Bank of England,and his successor, Mark Carney, have indicated that they supporta higher leverage ratio to curtail risk-taking.

Tyrie said that a "robust" leverage ratio was essential and3 percent was "almost certainly too low". The PCBS did not saywhat the ratio should be, but an independent commission lastyear suggested 4 percent, which would limit banks' leverage to25 times capital.

Banks have warned that the severity of the proposed reforms- more rigorous than those in France and Germany - could putBritish banks at a disadvantage against continental rivals suchas Deutsche Bank and BNP Paribas.

The British Bankers' Association, which has previouslywarned that UK banks will find it harder to raise capital andfund lending if reform is too onerous, on Monday urged thegovernment to work with other European countries to coordinatereforms.