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* BoE says UK credit conditions largely back to normal
* Aims to change counter-cyclical capital buffer slowly
* Further increases in capital will only be incremental (Adds more reaction)
By Huw Jones and David Milliken
LONDON, Dec 1 (Reuters) - British banks including HSBC andLloyds have almost completed the job of building up theirdefences against a future financial crisis, Bank of EnglandGovernor Mark Carney said on Tuesday as he set out details ofnew capital requirements.
Banks may have to hold up to 10 billion pounds ($15 billion)more capital to meet rules designed to link the capital theymust hold to protect against financial risks to the state of theeconomy, a relatively small sum compared with the hundreds ofbillions they have raised to strengthen their position since thefinancial crisis.
Carney was keen to dispel banks' fears that the BoE wasgoing further than international rules required, andacknowledged that excess capital requirements could hurt growth.
"With today's announcement, the basic amount of capital oursystem requires is settled," he said, setting out plans for topUK banks including HSBC, Lloyds, Barclays after their annual health check.
RBS and Standard Chartered only passedafter taking remedial action.
"While the benefits of increased resilience are clear,higher capital costs are ultimately passed on to borrowers," hesaid.
British finance minister George Osborne has called for a"new settlement" with banks after introducing a welter oftougher rules. Carney said there was absolutely no politicalpressure on the BoE to ease the pressure on lenders.
The BoE's Financial Policy Committee "seems positivelyrelaxed about the current state of the banking system", saidSamuel Tombs at Pantheon Macroeconomics.
The BoE also released the results of annual 'stress tests'into how Britain's big seven lenders would deal with unexpectedeconomic shocks.
This year the focus was on emerging market and tradingrisks, and Royal Bank of Scotland (RBS) and Standard Charteredboth only passed thanks to steps they took to improve theircapital ratios during the process, which lifted their leverageratios above the minimum 3 percent level.
The other five big lenders tested - HSBC, Barclays, LloydsBanking Group, Santander and Nationwide - did not haveto take action.
"RBS was always still further behind in the journey butLloyds and Barclays are fine, with no material threats offurther capital raising or, in Lloyds' case, growing dividendsover time," Richard Buxton, CEO of Old Mutual Global Investors,a shareholder in RBS, Barclays and Lloyds, told Reuters.
Shares in Barclays were up 3.9 percent at 1145 GMT, RBS wasup 3.2 percent, Lloyds was up 2.6 percent and HSBC up 1.8percent as investors breathed a sigh of relief that the outlookon capital requirements was clearer.
The BoE said that credit conditions were largely back tonormal after the financial crisis and therefore banks shouldhold an extra so-called counter-cyclical capital buffer (CCB) of1 percent of risk-weighted assets during such times - equivalentto 10 billion pounds across the system.
The BoE was now tweaking the requirements individual banksmust meet with a view to imposing the add-on buffer step-by-stepfrom March.
The CCB aims to rein in risky lending at frothier stages ofthe credit cycle. It stands at zero currently, but the BoE hasalready required some banks to hold extra capital due tofirm-specific risks, meaning some lenders may not have to raisemuch fresh capital.
Some economists and banking analysts had expected the BoE toraise the CCB this month to 0.5 percent.
The BoE also said it expected the banking sector as a wholeto hold high-grade tier one equity capital of 13.5 percent ofrisk-weighted assets by 2019, up from 13 percent now.
The 13.5 percent figure is equivalent to 12 or 12.5 percentof best quality core equity, a level some banks already have.
The BoE has said it wanted to give banks more clarity aboutits long-run aims for the amount of capital they hold. Bankshave complained that in the past, the BoE has unexpectedly piledon extra capital requirements, making it hard for them to lendor decide which lines of business to stay in.
HIGHER RATE RISK
The BoE Financial Policy Committee's report comes as marketsbrace for the United States to raise interest rates later thismonth for the first time since the financial crisis.
"Financial market prices remain vulnerable to a sharpincrease in market interest rates or the compensation demandedby investors for risky assets," the report said.
With the BoE's Monetary Policy Committee unlikely to raiseBritish interest rates until later next year, the FPC is havingto take other steps to guard against risky behaviour.
Even if domestic cost pressures are too weak to warrant arate rise, British consumer and mortgage lending is growing atits fastest rate since the financial crisis.
So-called buy-to-let mortgages - which enable smalllandlords to purchase property to rent out - showed weakerunderwriting standards than residential mortgages and the BoE'sPrudential Regulation Authority said it was examining this.
The FPC said it stood ready to take action if needed andwould monitor closely the impact of higher property transactiontaxes for buy-to-let purchases which finance minister GeorgeOsborne announced last week and will take effect next April. ($1 = 0.6626 British Pounds)
(Additional reporting by Steve Slater, Sinead Cruise and SimonJessop; Editing by Mark Potter and Giles Elgood)
