UPDATE 2-British banks buoyed by new rules on risk buffers

* BoE announces variable "leverage ratio" for UK lenders

* Move aims to reduce risk banks would need public bailout

* Ratio for big banks seen near 4 pct, can rise to 5 pct

* Exact figures subject to size of bank, state of economy

* Barclays shares jump 8 pct; RBS, HSBC, Lloyds also up (Adds details of proposals, updates share moves)

By David Milliken and Steve Slater

LONDON, Oct 31 (Reuters) - The Bank of England told Britishbanks on Friday they will need to hold more capital to guardagainst the risks of bad loans, but the new measures were lessstringent than many had expected.

Shares in Barclays -- the bank that analysts saidwas most at risk from tough new rules -- jumped 8 percent on thenews, and shares in other lenders also rose.

The new leverage ratio -- the minimum amount of capitalbanks must hold relative to their loans -- is part of globalreforms introduced after the 2007-09 financial crisis to reducethe chances of banks needing public bailouts.

Britain's central bank said the ratio could rise to up to4.95 percent from 2019, from 3 percent now.

That would mean banks have to hold 1 pound of capital forevery 20 pounds they lend, compared to 1 pound for every 33pounds under current leverage rules.

"The (BoE's Financial Policy) Committee believes that itsproposals for the design and calibration of the framework willlead to prudent and efficient leverage ratio requirements,"Governor Mark Carney said in a letter to finance minister GeorgeOsborne.

The ratio requirement will be based on three things: aminimum level of 3 percent, a supplementary buffer for"systemically important" banks, and an additional"countercyclical buffer" that would be imposed when the economyis strong.

Although that could see the ratio set at 4.95 percent, it islikely to be closer to 4 percent for most banks, and lower forbuilding societies -- customer-owned lenders primarily dedicatedto issuing home loans.

Banking sources had expected the ratio to be increased tobetween 4 percent and 5 percent, which, analysts said, bankscould adapt to as long as they had several years to reach it --as they will under the proposed reforms.

"It's a little complicated but I'd expect the banks will bepleasantly surprised," said Allison Breault, a lawyer withCleary Gottlieb Steen & Hamilton, based in Brussels.

NO DRAMATIC CHANGES

"There was an expectation the ratio would be 4 percent ormore, so I don't think most banks will need to make dramaticchanges as a result of these new requirements," Breault said.

The BoE's proposal is one in a series of steps since thefinancial crisis aimed at making banks protect themselves betteragainst future risks and avoiding a repeat of the 66 billionpound ($105 billion) taxpayer bailout of Royal Bank of Scotland and Lloyds.

Britain is going further than a plans by global regulatorsto set a 3 percent minimum leverage ratio, but not as far asU.S. regulators, who may lift it to 5 percent or more.

Banks have argued that setting too tough a level would forcethem to hold excess capital that would reduce profits, push upthe cost of lending and cut the amount of credit available tohome-buyers and companies.

The BoE says safer banks will find it cheaper to raisefunds, and that large banks that operate with dangerously lowlevels of capital effectively receive a public subsidy becauseinvestors think taxpayers will step in to stop them failing.

Under the BoE's rules, four banks considered systemicallyimportant, or so big that their failure could trigger afinancial crisis, will need to hold extra capital by 2016.

Based on assessments set by the Financial Stability Board --an international body based in Basel, Switzerland that iscurrently chaired by Carney -- HSBC would need aleverage ratio of 3.9 percent, Barclays would need 3.7 percent,RBS would need 3.5 percent and Standard Chartered wouldneed 3.4 percent.

The Bank of England will review the strength of the economyevery quarter to see whether it needs to impose acountercyclical buffer which could add as much as 0.9 percentagepoint to the leverage ratio. Banks would have two years to meetany change.

The BoE's proposals are now up for review by Britain'sfinance ministry, which will consult with the banks affected.

Analysts said all of the listed UK banks already meet therequirement, apart from Barclays, which should be able to do sowithin six months.

Barclays' leverage ratio was 3.5 percent at the end ofSeptember, and it said it was "very confident" of being able tomeet the rules laid out.

Barclays shares were up 8.3 percent at 241 pence by 1550GMT, their highest level for four months. RBS was up 5.8percent, HSBC rose 1.7 percent and Lloyds was up 2.4 percent.

(1 US dollar = 0.6260 British pound) (Additional reporting by Matt Scuffham; Editing by RobinPomeroy)