UPDATE 2-Moody's warns European banks need more cash

* Banks in Spain, Italy, Ireland, UK need more provisions

* UK banks may be underestimating property loan risks-Fitch

* FSA review of UK banks' risk-weighted assets ends in March

By Laura Noonan

LONDON, Jan 24 (Reuters) - Banks in Spain, Italy, Irelandand Britain need to set aside much more money to coverpotentially bad loans, credit ratings agency Moody's said onThursday, meaning European taxpayers may again be tapped forcash.

European banks have already raised hundreds of billions ofeuros to cover possible losses from loans that soured inproperty and financial market crises. Much of the funding hascome from governments.

"We believe that many banks, in particular in Spain, Italy,Ireland, and the UK, require material amounts of additionalprovisions to fully clean up their balance sheets," Moody's saidin its global banking outlook for 2013.

"Some banks have in recent years delayed full recognition ofembedded loan losses, partly by restructuring loans," the reportadded. "This strategy of buying time (often tolerated byregulators) limits a bank's capacity for new lending and posesrisks for creditors of European banks."

Moody's did not say how much extra money banks would need.

Rival agency Fitch also warned on Thursday that Britishbanks could be underestimating the riskiness of their propertyloans and may need more capital to correct this.

Moody's believes 2013 will be a volatile year for Europe'sbanks, but expects their credit ratings to remain relativelystable after a raft of downgrades in 2012.

The agency's outlook for U.S. banks is negative due to achallenging home market, while its outlooks for Asia/Pacific,Emerging Europe and Latin America are stable.

MEASURING RISK

Fitch's view on British banks' assessment of risk chimeswith comments from the Bank of England (BoE) in November.

The BoE said Britain's four biggest banks - HSBC,Barclays, Royal Bank of Scotland and Lloyds - could be over-stating their capital levels by between5 billion and 35 billion pounds ($55 billion) because of the waythey measure risk.

Britain's Financial Services Authority is reviewing howbanks weight the riskiness of their loan books and lenders willbe told by March if they need to beef up their capital reservesto protect against loans going sour. The results of the revieware not expected to be made public.

"We expect that banks will have to set aside more capitaland that this requirement will probably be addressed either byway of additional capital buffers or higher risk-weightings forcertain classes of loans," Claudia Nelson, senior director offinancial institutions at Fitch, told Reuters.

"The measures are likely to be introduced gradually."

A Fitch study showed how retail lenders' assessment of theirloan books has grown rosier since the financial crisis despiterising unemployment and a poor economic outlook.

From the end of 2007 to the end of June 2012, the banks'risk weighted assets (RWAs) nearly halved to 35 percent from 65percent despite their loan books, comprised mainly of mortgages,staying relatively stable.

The lower the RWA weighting the greater the chance the loanwill be repaid and the less capital a bank needs to hold on itsbooks.

A study of banks with a higher exposure to residentialmortgages revealed an even sharper fall in their perceived risk,despite a weaker property market, Fitch said.

Nelson declined to say how much more capital banks couldneed.