UPDATE 1-UK's BoE proposes stricter rule for banks to calculate capital

* New proposals would take effect from next year

* Consultation on proposals until Oct. 12 (Recasts with comments from consultation paper, background)

By Huw Jones

LONDON, July 10 (Reuters) - Britain's banks could have touse a stricter method than global peers for calculating a keymeasure of capital from next year to make gaming the rulesharder, the Bank of England said on Friday.

The BoE's Prudential Regulation Authority (PRA) published aconsultation paper setting out how lenders should compile andpublish leverage ratios, a measure of capital to balance sheetson a non risk-weighted basis.

The benchmark is separate from a bank's core ratio, whichmeasures capital to risk-weighted assets.

Under European Union rules brought in after the 2007-09financial crisis revealed inadequate capital at banks, lendersmust publish their leverage ratio at the end of each quarter.

The PRA's proposed method seeks to supplement this with amore stringent approach based on daily-averages throughout thequarter, moving in line with the United States.

"The PRA is of the view that reporting and disclosing apoint-in-time leverage ratio alone could create incentives forfirms to manage down temporarily around the reporting date,their exposure measure so as to flatter their leverage ratio, apractice commonly referred to as 'window dressing'," theregulator said.

"Requiring an averaged figure for a firm's leverage ratioacross the reporting period should largely eliminate incentivesto adjust this ratio on any specific date, as any increaseachieved is likely to have little impact on the averagedfigure," the PRA said.

It is the latest sign of how more hawkish regulators such asthe PRA are making it harder for banks to skirt rules.

Policymakers have said that lower book values of banks inEurope compared with their U.S. rivals are partly due toinvestors not fully believing the capital ratios they report.

The BoE has mulled requiring larger banks to calculate corecapital ratios using a "standard" formula used by smaller banksas well as using in-house models, whose consistency has beenquestioned.

Britain, Switzerland and the United States have put moreemphasis on a bank's leverage ratio, which was originally meantto be a simple "backstop" to core buffers.

All three countries are forcing their banks to have higherleverage ratios than what has been globally agreed so far by theBasel Committee of supervisors from across the world.

Basel allows for more stringent ways to compile a leverageratio as long as this is done consistently.

The UK change would be phased in over a year from Januaryand the PRA said the cost to banks would not be material.

($1 = 0.6437 pounds) (Additional reporting by Matt Scuffham; Editing by SineadCruise and Mark Potter)