Industry insiders see the implications of the reform as significant.

Expectations are that banks may be required to raise their leverage ratios to as high as 5 percent, from a current 3 percent, implying a further multi-billion pound stockpiling of capital to shield them from future losses.

One senior executive at a UK bank said a 5 leverage ratio would be "a huge game changer" for banks and hurt their appetite for mortgage lending - underscoring the potential broader economic impact of the way the sector is regulated.

Others warn it will pressure banks to restrain their level of dividend payments, as the sector also grapples with broader "stress tests" of their finances being conducted at European level and other rules targeting their capital levels.

Morgan Stanley analyst Chris Manners estimated dividend payouts next year will be 30 percent below current expectations. Analysts on average predict decent dividend rises at all banks other than Royal Bank of Scotland (RBS) (>> Royal Bank of Scotland Group plc), but Manners predicted only HSBC (>> HSBC Holdings plc) and Lloyds (>> Lloyds Banking Group PLC) will increase, and by modest amounts.

"We do expect the rising leverage ratios, coupled with the rising common equity bar towards a steady state of 12 to 13 percent and upcoming stress tests, means the pressure will remain to retain capital," Manners said.

Banks have until Friday to respond to proposals for the leverage ratio framework set out by the BoE's Financial Policy Committee (FPC). The FPC will finalise plans in November, although it will not set the minimum level banks have to reach until around mid-2015, industry sources said.

The top banks and the British Bankers' Association lobby group declined to give any details of their responses to the consultation.

The FPC's consultation paper made clear it may add several "top ups" to the basic leverage ratio, such as a "conservation buffer" that lenders build up during good times, or an add-on for big banks to make rules more stringent for the biggest lenders.

Britain's top five banks - HSBC, Lloyds, Barclays (>> Barclays PLC), RBS and Standard Chartered (>> Standard Chartered PLC) - could have a 46 billion pound capital shortfall if they had to meet a 5 percent leverage ratio this year - including a 24 billion pound gap at Barclays - but they should be able to close that hole by 2017, Morgan Stanley estimated.

Either way, the leverage ratio - a simple measure of capital as a percentage of assets that takes no account of the riskiness of loans - looks certain to become a more important driver of how much capital banks hold, bankers and analysts say.

MORE IMPORTANT

Up to now regarded as a "backstop" to the more important risk-weighted capital ratios, the leverage ratio appears set to rise to at least 4 percent and possibly to 5 percent, several bankers told Reuters, based on their interpretation of the FPC consultation document.

To soften the impact, banks are likely to be given between three and five years to get to that level.

"We assumed it wasn't stopping at 3 percent, we assumed it wasn't stopping at 4 (percent)," Tom King, head of Barclays' investment bank, said this week in reference to the leverage ratio Barclays planned for when it set a new strategy in May.

"So whether it's 5 (percent) or north of five, we think given a sensible glide path we can get there without impacting RoEs (return on equity targets)," King told investors.

Banks are not expected to have to rush out and raise equity to meet the new rules, unlike last year, when Barclays raised 6 billion pounds in a rights issue after the Bank of England forced it to quickly improve its leverage, and building society Nationwide (>> Nationwide Building Society) also had to raise cash.

Banks are already improving ratios to avoid the need for radical action by retaining earnings, issuing bonds that can convert into equity and slashing assets, because investors typically prefer them to meet regulatory levels early.

Improving its leverage ratio is a key part of Barclays' plan to shrink its assets and the bank's ratio rose to 3.4 percent from 3 percent in the first six months of this year, as it shed 100 billion pounds of assets.

Yet the threat of a more stringent leverage ratio continues to raise concerns.

Building societies have slammed the FPC proposals as a "primitive approach" that discriminated against them, as low-risk residential mortgages make up the bulk of their loan books.

Others said the attraction of the leverage ratio was its simplicity, and the FPC risked making the rules too complex.

Global regulators have set a minimum standard of 3 percent, but that could be increased in two to three years and Britain and the United States are among those looking to go further, driven by concern that banks can "game" risk-weighted capital ratios and they do not reflect the true risk of loans.

The FPC could also limit banks' use of so-called hybrid capital to help their leverage ratio, potentially limiting the usefulness of bonds that several banks have sold in the past year, which convert into equity if a bank hits trouble.

(Editing by David Holmes)

By Steve Slater