* Lloyds had core capital of 6.2 pct, above 5.5 pct minimum
* RBS had core capital of 6.7 pct
* UK banks face further BoE stress test in December
* Lloyds must prove capital strength for dividend clearance (Adds reaction from government, Lloyds Banking Group)
By Matt Scuffham
LONDON, Oct 26 (Reuters) - Britain's Lloyds Banking Group narrowly passed a test set by European regulators toassess whether banks have enough capital to weather anothereconomic crash, calling into question its chances of re-startingdividends.
Lloyds, which is 25 percent owned by the British governmentafter being rescued during the 2007-2009 financial crisis, wouldhold a core Tier 1 capital ratio of 6.2 percent under thestress-test scenarios, above the 5.5 percent minimum required.
The close outcome could have implications for Lloyds, whichis in talks with Britain's financial regulator about restartingdividend payments and must prove it has the capital strength tocope with future market shocks to gain permission to do so.
Like other British banks, Lloyds faces a further test of itscapital strength by the Bank of England in December.
The BoE said on Sunday that the European results should notbe seen as indicative of the result of its own test, whichassesses banks under a scenario where house prices fall by 35percent and interest rates rise to 6 percent. The BoE test willplace additional pressure on Lloyds, which is Britain's biggestprovider of residential mortgages.
Banking sources said on Sunday that Lloyds remainedconfident of passing the BoE test, clearing the path for it topay a dividend for the 2014 financial year and for thegovernment to sell off more shares in the bank.
They pointed out that the bank will benefit from itsimproved capital position since the end of 2013 being taken intoaccount in the BoE test while one-off costs associated withhiving off its TSB business are not included. Lloyds' corecapital had risen to 11.1 percent at the end of June, 2014,compared with 10.3 percent at the end of June.
The result of the BoE test will be a key factor indetermining whether Lloyds can pay a 2014 dividend. Reutersreported earlier in October that the government is unlikely tosell more shares until the bank is ready to pay dividends.
Lloyds said the result of the European test "reflects thesteps taken by the group's management over the last three yearsto return its balance sheet to a robust position".
Rival state-backed lender Royal Bank of Scotland,which is 80 percent owned by the government, passed the Europeantest and would hold core capital of 6.7 percent under theadverse scenarios, the European Banking Association said.
Barclays passed the test with core capital of 7.1percent while HSBC passed with core capital of 9.3percent.
"This shows our robust reforms to build a more resilientbanking sector are working," said Andrea Leadsom, Britain'sEconomic Secretary to the UK Treasury.
Industry sources had expected that RBS would be the Britishbank that fared weakest in the test and the result reflectsprogress made by Chief Executive Ross McEwan in simplifying thebank and bolstering its capital strength.
RBS will also enter the BoE's test in a stronger position.
The bank's core capital ratio had risen to 10.1 percent atthe end of June, up from 8.6 percent at the end of 2013. It hassince strengthened its capital again as a result of a stockmarket listing of its U.S. business Citizens in September. (Editing by Catherine Evans)
Lloyds (LLOY)