UPDATE 2-Bank of England gives banks until 2020 to build crisis funds

* 400 lenders must hold an extra 223 bln stg cushion

* Current net shortfall vs that target is 27 bln stg

* Most of the shortfall at the biggest lenders (Adds lawmaker, consultant comment)

By Huw Jones

LONDON, Dec 11 (Reuters) - Britain's banks will have until2020 to build crisis funds to shield taxpayers from having tobail out failed lenders again, the Bank of England (BoE) said onFriday.

The BoE was setting out new rules for how 400 banks andbuilding societies will in total have to hold an additional 223billion pound ($338 billion) cushion of loss-absorbing bonds.

The net shortfall against that target is currently about 27billion pounds across the 400, nearly all of it at the biggestlenders such as HSBC, RBS, Barclays and Lloyds, which will have to hold bonds equivalent toat least twice their current minimum capital requirements.

The bonds would be written down to top up depleted corecapital buffers in the event of a failure, thereby givingregulators time to close or restructure the bank in an orderlyway and avoid the market mayhem of Lehman Brothers' 2008 crash.

The rules, published for consultation, are based on aEuropean Union law that will require all banks across the28-country bloc to hold the extra buffer known as minimumrequirement for own funds and eligible liabilities, or MREL.

The BoE estimated the net shortfall of such funds iscurrently 26 billion pounds for the biggest banks, for which theMREL will cost some 1.4 billion pounds a year to service.

The vast majority of MREL requirements will be met byre-issuing or rolling over 195 billion pounds of existing debtat banks over the next four years to make it eligible.

The new rules are seen by policymakers as the final piece ofbanking regulation since the 2007-09 financial crisis to endso-called "too big to fail" banks.

"The implementation of MREL is a crucial step forward toensuring that any bank, large or small, carries sufficientresources to be resolved in an orderly way, without recourse topublic subsidy and without disruption to the wider financialsystem," BoE Governor Mark Carney said in a statement.

The aim is to ensure shareholders and bondholders bear thelosses when a lender goes bust. The UK government poured 115billion pounds into banks to keep them afloat during thefinancial crisis.

NOT SOFT

EU moves to put creditors and not taxpayers on the hook forbank failures were evident on Friday when Italians rushed tosell their bank bonds after taking fright at losses imposed oninvestors in four small lenders which had to be rescued lastmonth.

Andrew Tyrie, chairman of the UK parliament's treasurycommittee, said UK banks that complained about the newrequirement should remember that safer lenders are moreattractive to investors.

"What's more, they will have ample time to adapt to theserequirements," Tyrie added.

David Strachan, head of Deloitte's regulatory strategycentre in Europe, said the BoE's proposals set stricter criteriathan EU law for what types of debt could be included in MREL.

The BoE said depositors could, in some circumstances, alsobear losses on amounts held in accounts above the 75,000 poundsthat is automatically insured under EU rules.

Banks will be told in the second quarter of 2016 what is theindicative amount of MREL they must hold by January 2020.

The lenders will be given some flexibility as to how theywill reach that level, the BoE said.

HSBC, Barclays, RBS and Standard Chartered have already beenclassified among the 30 global systemic banks which must hold alayer of bonds know as TLAC. The BoE said their level of MRELwould not be higher than the globally-set TLAC, but that theymust begin complying by the 2019 deadline.

($1 = 0.6600 pounds)

(Editing by Andy Bruce and Mark Potter)