UPDATE 2-Investment banks in UK face capital shortfall: central bank

* PRA sees 27-29 billion pound shortfall for investmentbanks

* PRA gives breathing space on leverage ratio to many firms

* No escape on maintaining cash buffers

* PRA yet to consider any changes to bonus rules

By Huw Jones

LONDON, Aug 2 (Reuters) - Foreign investment banks inBritain face a shortfall of up to 29 billion pounds to meet newEU capital rules aimed at shielding taxpayers from having torescue banks again, the Bank of England said on Friday.

The rules implement new global standards known as Basel IIIin the 28-country bloc, forcing banks to roughly triple theamount of capital they must hold compared with before the2007/09 financial crisis when several banks were bailed out.

The central bank's Prudential Regulation Authority, whichsupervises lenders, set out how it plans to apply the rules to2,176 firms in Britain from 2014.

The PRA has already forced big domestic lenders likeBarclays and HSBC to meet or exceed the newrules and Friday's consultation largely affects how smallerbanks and other financial institutions must comply.

It estimates that big deposit-taking banks face an annualcost of 9.5 billion pounds ($14.4 billion) at most to complywith the rules.

For the first time it estimated the shortfall at theinvestment firms it regulates - meaning the non deposit-takingbanks - saying they will have to find 35 billion to 43 billionpounds to comply with the new rules, the PRA said.

The investment firm category includes foreign investmentbanks like Goldman Sachs, Morgan Stanley, JPMorgan and Deutsche Bank operating in London.

The shortfall would shrink to 27 billion-29 billion poundsduring the phase-in of the new rules which runs to 2018 ifinvestment firm balance sheets were "adjusted", the PRA added.

"The lower estimate reflects the reduction in risk, andtherefore risk-weighted assets, that investment firms may holdonce they have adjusted to the... requirements," the watchdogsaid in its consultation paper.

Investment banks globally are trimming their holdings ofrisky assets so they don't have to raise expensive new capital.

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In a move likely to surprise banks, the PRA also proposed asignificant toughening up of a key capital rule from 2016.

Supervisors in the EU like the PRA can ask lenders to top uptheir capital above the new mandatory minimum level to coverspecific risks like a sudden shift in interest rates.

The PRA wants the extra capital to be in the highest andhence most expensive form such as shares or retained earnings,and no longer in lower quality debt or other instruments.

The EU rules also force banks to build up cash buffers from2015 to withstand market shocks.

The PRA said it would continue to use its discretionarypowers to make sure firms hold enough cash until the EU rulescome into effect, signalling there will be no temporary relief.

A third element of the EU rules is a new limit on balancesheets in relation to capital levels, known as a leverage ratio.

The PRA, which is forcing big banks to comply early withthis rule, signalled on Friday it will give smaller firmsbreathing space.

The watchdog will consider at a later date whether thesmaller banks, foreign investment banks and building societiesmust also disclose their leverage ratios before the EU's 2015start date.

The PRA is still considering whether to change rules onbankers' bonuses in response to a UK parliamentary commission onbanking standards.

The commission wants the PRA to have powers to cancel abonus not yet paid out if a bank ends up needing taxpayer help.The lawmakers also want bonuses deferred for up to 10 years. TheEU rules will limit bonuses to no more than a banker's fixedsalary.