(Adds confirmation from FSA, detail, shares)
LONDON, Oct 10 (Reuters) - Britain's financial regulator has relaxed capital and liquidity rules on banks in an effort to stimulate lending and boost the economy, lifting bank shares.
The Financial Services Authority said on Wednesday the shift in policy was set out in the Bank of England's Financial Policy Committee in September, and banks were aware of the changes.
Banks no longer need to have a 10 percent core capital ratio but can instead hold a fixed amount of capital. The aim is to get banks to strengthen their capital and also be able to dip into buffers at times of difficulty so they can keep lending.
Andrew Bailey, head of the FSA's prudential business unit, had said last week banks can cut the amount of capital they hold to the minimum requirements, and trim their cash-like liquidity buffers to help increase lending.
The regulator will also not require banks to hold extra capital against new lending that qualifies for a "funding for lending" (FLS) scheme targeted at loans to corporate borrowers.
"The goal is to avoid rapid deleveraging that would harm activity in the economy," Andrew Bailey told the Financial Times.
The shift in tone lifted bank shares, as British regulators have been among the strictest in implementing new global regulations.
"If they get a bit of leeway from the regulator, that is breathing space for these banks which, in the short term, is good for the shares. Longer term, I stay very cautious," Bernstein Research senior analyst Chirantan Barua said.
Lloyds shares were up 3.6 percent by 0845 GMT, Royal Bank of Scotland firmed 2.6 percent and Barclays
added 1.3 percent, all outperforming a 0.1 percent higher European bank index .
Analysts said there were mixed messages coming from the regulator on capital rules.
Minutes of the September FPC meeting showed it wanted banks to tap outside investors for capital and said policymakers had a range of views about the existence and strength of any trade-off between tighter regulation and greater lending.
The shift to a fixed amount of capital from a capital ratio chimes with a move by the European Union's banking regulator last week.
The European Banking Authority said EU banks, which had been required to hold capital of 9 percent of their risk-weighted assets, will in future be told to hold a set amount, so they do not need to top up capital if they increase lending.
Policymakers have been attempting to stop tougher new regulations from choking off economic recovery.
FLS, a scheme that offers banks cheap finance if they increase lending to households and businesses, opened at the start of August but has yet to get credit flowing and prove its worth.
(Reporting by Stephen Mangan, Steve Slater and Toni Vorobyova; Editing by Dan Lalor)
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Keywords: BRITAIN BANKS/FLS