UPDATE 1-UK banks face higher capital demands under new tests

* Annual stress test start in 2014 with top 8 UK banks

* Later tests to include big subsidiaries of global bank

* Test results to be published

By Huw Jones and William Schomberg

LONDON, Oct 1 (Reuters) - Banks in Britain may have to holdmore capital than their international rivals under proposals foran annual stress test of lenders put forward by the Bank ofEngland on Tuesday.

The BoE, spelling out how it will check that banks do notpose risks to the UK economy by being short of backing, said itwould hold annual tests for major lenders like Barclays, RBS and HSBC starting in 2014.

Later tests would be broadened out to include big UKsubsidiaries of major international banks, the BoE said.

Medium-sized British banks may also come under the scrutinyof BoE regulators and clearing houses could face their ownhealth checks, the central bank said.

"Stress-testing can provide a quantum leap in transparencyand accountability," BoE Deputy Governor Paul Tucker said.

Mike Trippitt, director of banks' research at NumisSecurities in London, said banks were already starting to seestrong enough profits to build up capital buffers that wouldmeet even a pessimistic stress test scenario.

At any rate, shares in Britain's biggest banks wereunperturbed by the BoE's announcement, with most outperforming arise for the broader market on Tuesday.

"The capital position of banks is pretty strong and withoutlooking at the detail of the stress tests, what the market issaying is that these banks should be able to fare well,"Trippitt said.

Britain, which had to rescue several banks in the financialcrisis, has already required its lenders to do more to bolstertheir capital reserves than required under global rules and thatapproach looks set to continue under the new framework.

"At the very least, banks would need to maintain sufficientcapital to be able to absorb losses in the stress scenario andnot fall below internationally agreed minimum standards," theBank of England said.

"But the level of capital that banks would need to maintainin the stress scenario could be set above strict internationallyagreed minima and vary across banks."

REMEDIES

Since the near meltdown of global markets in 2008, Britain'sbanks have undergone several, ad hoc stress tests to check ifindividual lenders hold enough capital to withstand futureshocks without more help from taxpayers.

The new system proposed by the BoE in a discussion paperreleased on Tuesday would take a broader approach to also checkthe health of the financial system as a whole.

Apart from topping up capital levels, remedies could includeraising margin requirements on derivatives contracts, curbingdividends and bonuses, forcing banks to shrink risky businesslines and changing management.

Unlike past tests, the BoE said it intended to publish theresults of its future checks.

The bank said that in previous tests there was "insufficientengagement" by management, poor test design, discrepancies indata and too little challenge of underlying assumptions.

The results of the first tests under the new framework willcover eight major UK banks and will be published at the end of2014.

Under the plan, the Bank plans to use a twin approach totesting, with all banks facing a common set of stressed marketscenarios and individual ones to look into their specificvulnerabilities.

The bank said the two-track system would make it harder forlenders to downplay the amount of capital they might need, asign of how regulators want to move away from relying onin-house models used by banks to determine capital requirements.

Britain's biggest banks also face the next stress tests byEuropean Union regulators next year.