UPDATE 1-UK watchdog eases capital rules for pension risks

* PRA eases up on planned supplementary capital rule

* New rule takes effect year earlier than planned

* Capital targets for big eight banks formalised

* Compliance dates for smaller banks mapped out (Recasts with more detail)

By Huw Jones

LONDON, Nov 29 (Reuters) - Britain's banking regulator hasrelaxed a new rule determining the quality of assets banks musthold to cover risks from pension liabilities.

The Bank of England's Prudential Regulation Authority (PRA)had proposed that all the extra capital which comes on top ofmandatory minimum buffers, should eventually be in the mostexpensive form, such as shares or retained earnings.

The PRA said on Friday that "in light of consultationresponses" at least 56 percent of the supplementary capital tocover mainly pension risks should be in top quality assets, andnot all of it over time, as originally proposed.

But the new rule will come into force on January 1, 2015, ayear earlier than proposed.

Shares in Barclays rose more than 2 percentfollowing the announcement, with many of the other top UK banksalso rising.

Banks currently meet the requirements to cover pension riskswith any form of regulatory capital, and the original proposalfrom the PRA raised hackles at banks already facing heavy corecapital demands.

Banks had also challenged the inclusion of pension risk inthe capital rule but the PRA has rejected their arguments.

"These decisions will enhance the stability of the financialsector and strengthen the capital regime in the UK," the PRAsaid.

"Although the PRA has not finalised all aspects of therules, it is setting out a number of key decisions in order togive firms clarity on the key policy issues that affect theminimum level of common equity tier 1 (CET1) capital which firmsneed to maintain," the PRA said.

The PRA said eight major lenders and building societies musthold a core capital buffer equivalent to 7 percent of theirrisk-weighted assets from January 2014.

They are: Barclays, Co-operative Bank,HSBC, Lloyds, Nationwide, Royal Bank ofScotland, Santander UK and Standard Chartered.

The eight must comply with a leverage ratio of 3 percentfrom the same date. This is a measure of capital in proportionto a bank's total assets on a non-risk weighted basis.

These minimums come from a global bank capital accord knownas Basel III, which is not due to take full effect until thestart of 2019 but Britain is moving earlier with major lenders.

The Co-op Bank, Barclays and Nationwide have alreadyannounced plans on how they will meet these targets.

The watchdog also published a timetable for how smallerbanks must comply with the new capital rules which are beingintroduced across the European Union and based on Basel. (Additional reporting by Steve Slater, editing by ElaineHardcastle)