UPDATE 1-Regulator eases UK bank rules to support lending

(Adds confirmation from FSA, detail, shares)

LONDON, Oct 10 (Reuters) - Britain's financial regulator hasrelaxed capital and liquidity rules on banks in an effort tostimulate lending and boost the economy, lifting bank shares.

The Financial Services Authority said on Wednesday the shiftin policy was set out in the Bank of England's Financial PolicyCommittee in September, and banks were aware of the changes.

Banks no longer need to have a 10 percent core capital ratiobut can instead hold a fixed amount of capital. The aim is toget banks to strengthen their capital and also be able to dipinto 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 holdto the minimum requirements, and trim their cash-like liquiditybuffers to help increase lending.

The regulator will also not require banks to hold extracapital against new lending that qualifies for a "funding forlending" (FLS) scheme targeted at loans to corporate borrowers.

"The goal is to avoid rapid deleveraging that would harmactivity in the economy," Andrew Bailey told the FinancialTimes.

The shift in tone lifted bank shares, as British regulatorshave been among the strictest in implementing new globalregulations.

"If they get a bit of leeway from the regulator, that isbreathing space for these banks which, in the short term, isgood 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 percenthigher European bank index .

Analysts said there were mixed messages coming from theregulator on capital rules.

Minutes of the September FPC meeting showed it wanted banksto tap outside investors for capital and said policymakers had arange of views about the existence and strength of any trade-offbetween tighter regulation and greater lending.

The shift to a fixed amount of capital from a capital ratiochimes with a move by the European Union's banking regulatorlast week.

The European Banking Authority said EU banks, which had beenrequired to hold capital of 9 percent of their risk-weightedassets, will in future be told to hold a set amount, so they donot need to top up capital if they increase lending.

Policymakers have been attempting to stop tougher newregulations from choking off economic recovery.

FLS, a scheme that offers banks cheap finance if theyincrease lending to households and businesses, opened at thestart of August but has yet to get credit flowing and prove itsworth.

(Reporting by Stephen Mangan, Steve Slater and Toni Vorobyova;Editing by Dan Lalor)

(stephen.mangan@thomsonreuters.com; +44 20 7542 7931)