Bank of England's King makes last call for more stimulus, bank reform
* BoE's King says UK recovery not secure, more QE needed
* Banks need more capital, must regain public trust -King
* King speaks as Osborne outlines bank reform plan
LONDON, June 19 (Reuters) - Britain's economic recovery is not yet secure and more needs to be done to ensure the country's banks no longer pose a threat to taxpayers, Bank of England Governor Mervyn King said in his final speech on Wednesday.
King steps down at the end of this month after more than 20 years at the bank, to be replaced by former Canadian central bank chief Mark Carney, and the 65-year-old stuck to familiar themes in an annual address to London's financial elite.
"There is a powerful case for more stimulus in the short run," said King, who has spent the last five months at the helm of the BoE's Monetary Policy Committee as part of a dissenting minority calling for a new round of asset purchases.
"A recovery in the UK, albeit modest, is underway ... (but) growth is not yet strong enough to reduce the considerable margin of spare capacity in the economy. Nor is recovery at an adequate rate fully assured."
While Carney has been hired by finance minister George Osborne with a brief to find new ways for the BoE to boost Britain's economy, his appetite for asset purchases is less clear, and economists think there may be no more this year.
But King said unnecessarily high unemployment was now a bigger threat to Britons' well-being than inflation - which has exceeded the BoE's 2 percent target for most of the past five years - and that euro zone weakness and a troubled banking system remained the main obstacles to growth.
While global market interest rates had risen in recent weeks due to uncertainty about the U.S. Federal Reserve's future bond purchases, the world economy was too unhealthy to talk of rates returning to normal pre-crisis levels anytime soon, King added.
"Bond yields have risen. But such market moves should not be confused with a return to normality," he said.
BANKING ON REFORM
King was speaking just after Osborne told the same audience at Mansion House, the Lord Mayor of London's ornate official residence, about his plans to shake up Britain's two state-controlled banks.
King said he welcomed Osborne's plans to sell the government's 39 percent stake in Lloyds Banking Group and consider restructuring Royal Bank of Scotland - a step he has previously said should have been taken years ago.
But more needed to be done. On Thursday the central bank's regulatory arm will publish details of how much new capital Britain's banks need to raise, with media reports suggesting that Lloyds, RBS and Barclays will bear the brunt.
"There is clearly some way to go before we can claim to have a really well-capitalised banking system," King said, rejecting some banks' view that higher capital requirements are acting as a brake on their ability to support the economy.
A longer-term problem was the size of some British banks, which are still too large and complex to be able to collapse without causing financial chaos, King said.
"We must restore trust in our banking system," he said. "It is not in our national interest to have banks that are too big to fail, too big to jail, or simply too big. Solving these problems is the work of a generation."
Earlier on Wednesday, British legislators called for laws to imprison "reckless" bankers in a report welcomed by King, who has often criticised the culture in banking.
King's speech focused on future challenges, and not the main criticism laid against him: that he paid insufficient attention to bank stability before the financial crisis.
He also wished his successor well. "The Bank of England is in safe hands, and the country will be the better for it."