UPDATE 1-UK banks to need 3.3 bln pounds more capital under BoE plan

(Adds comments, details, shares)

By Steve Slater and David Milliken

LONDON, Oct 15 (Reuters) - Britain's big banks will need tohold billions of pounds of extra capital when they have toseparate their domestic high street banking operations fromrisky areas, the Bank of England said on Thursday.

New rules to be introduced from 2019 will require Britishhigh-street banking operations to be 'ring-fenced' from the restof the bank, effectively treating it as a separate company. Theaim is to better protect taxpayers in the event of a crisis.

The BoE said in a consultation paper on Thursday that thechanges would require the affected banks to hold 2.2 billion to3.3 billion pounds ($3.4-5.1 billion) of extra capital.

That is based on the BoE's estimate of how ring-fencing willreduce group-wide diversification benefits and could result inmore concentrated geographic and sector risk, requiring firms tohold more capital in reserve.

The aim is to ensure banks' day-to-day business of runningpersonal and small firms' bank accounts is safe from riskieractivities and to ensure the former continues in any crisis.

"Making our firms more resilient has been at the forefrontof our post-crisis reform agenda," said BoE deputy governorAndrew Bailey, who heads the central bank's regulatory arm, thePrudential Regulation Authority (PRA).

The amount of extra capital banks will need is also likelyto rise as ring-fenced units will also be told to hold an extra'systemic risk' buffer, which will be set by another arm of theBoE, its Financial Policy Committee, by the end of May.

Alan Bainbridge, global head of banks at law firm NortonRose Fulbright, said the proposals were "a clear signal that a'share-of-group' approach to capital is not going to be viewedas compatible with the ring-fencing purposes" set out in UKlegislation.

More positively for the banks, the PRA said the ring-fencedunits would be allowed to pay dividends to their parent company.

The ring-fencing rules will affect any bank with more than25 billion pounds of deposits. That is expected to include -HSBC, Lloyds, Barclays, Royal Bank ofScotland, Santander UK and Co-operative Bank.

Shares in all the affected listed banks were up by between0.3 percent and 1.2 percent by 0940 GMT, in line with a firmerEuropean bank index.

SHARED CRITICAL FUNCTIONS

Separate proposals to ensure banks can keep running if hitby a crisis were likely to cost banks a one-off amount of 5percent of their operating costs, and have ongoing annual costsof 3 percent, the BoE said.

For a big bank, this could be equivalent to a one-off costof 200 million pounds and an annual cost of 120 million pounds.

Banks were concerned that if the rules were applied toostrictly lenders would lose control of a major part of theirbusiness and would be unable to move capital from the'ring-fenced' unit to the parent group.

The BoE said ring-fenced units will be able to share mostcritical functions, such as technology and legal resources, withtheir parent group, though the new rules could force some firmsto change their structure and business models.

"This paper will require large scale restructuringoperations at all the major banks," said Rob Moulton, regulatorypartner at law firm Ashurst, adding that could include asset disposals to reviews of their outsourcing arrangements.

Banks are aiming to have their ring-fencing structures upand running from the start of 2018, a year ahead of deadline.

($1 = 0.6456 pounds) (Editing by Elaine Hardcastle)