UPDATE 1-Growing fines for bad banks make them harder to shore up, says BoE

* Potential fines now a key input into capital levels

* No global deal on bail-in debt mean higher capital levels (Adds more detail, background)

By Huw Jones

LONDON, July 10 (Reuters) - A mountain of accumulating finesfor banks that have broken the rules is making it harder forregulators to work out how much capital lenders need to hold tobe safe, Bank of England Deputy Governor Andrew Bailey said onThursday.

Banks like Barclays and RBS have been finedin total $6 billion for rigging the Libor interest ratebenchmark, and allegations are now emerging that the foreignexchange market has been manipulated as well.

"This is a considerable dent to rebuilding bank capital,"Bailey told a Bloomberg event.

Now, when stress-testing banks to ensure they can surviveany future shocks, regulators must consider any potential finesalongside other potential costs, Britain's top bankingsupervisor said.

The Bank is working closely with Britain's Financial ConductAuthority, which is probing the foreign currency allegations, tosee what fines generally could be in the pipeline, he said, andadded it was also keeping an eye on developments abroad.

"We have to read the direction of travel of other lawenforcement authorities, particularly in the U.S.," said Bailey,who heads the BoE's Prudential Regulation Authority thatsupervises British banks.

U.S. authorities have just fined French bank BNP Paribasnearly $9 billion for violating that government's sanctionsagainst Sudan, Cuba and Iran, sparking sharp criticism in Franceand concern in Europe that watchdogs in the United States aregoing too far.

Bailey said he was not criticising law enforcement agenciesfor doing their job as no bank should be "too big to jail".

"But," he added, "We have to be very clear that actions aretaken which do not undermine the stability of the financialsystem. There is very substantial contingency planning donearound these things. We have to deal with the potentialconsequences of this."

NO "ONE SHOT" GAME

Bailey added it would not be enough for banks simply tocomply with new minimum capital requirements, but rather thatthe "optimal" level of capital for each would depend on severalfactors - including how much liquidity a bank has, and whatstress tests being carried out in the European Union, uncover.

"We are not in a one shot game," he said.

Furthermore, he said, asset quality reviews - a type ofbalance sheet check the BoE has undertaken at British banks andnow underway at top euro zone lenders in a bid to draw a lineunder the currency area's debt crisis - were not foolproof.

"In the best of all worlds, supervisory initiated AQRsshould not reveal anything that isn't already known. I will justsay that experience shows that we are not there yet," he said.

Core capital levels will also hinge on banks having acushion of debt that can be tapped if the lender is bust.

Bailey warned that unless the Financial Stability Board(FSB), chaired by BoE Governor Mark Carney, clinches a globaldeal forcing the world's biggest banks to hold "bail-inable"debt - bonds that can be tapped to cover losses if they go bust- those banks would have to hold more core capital.

Carney wants a deal for the Group of 20 economies (G20) toendorse in November to end banks being "too big to fail".

"I am optimistic. I think we are making good progress onthat front," Bailey said.

He rejected criticism that stricter capital demands aremaking banks unable to lend or make money.

"There are many ways of making money banking. The core of itis lending and deposit taking," Bailey said. (Reporting by Huw Jones; editing by Sophie Walker)