Growing fines for bad banks make them harder to shore up, says BoE

* Potential fines now a key input into capital levels

* No global deal on bail-in debt mean higher capital levels (Adds more detail, background)

By Huw Jones

LONDON, July 10 (Reuters) - A mountain of accumulating fines for banks that have broken the rules is making it harder for regulators to work out how much capital lenders need to hold to be safe, Bank of England Deputy Governor Andrew Bailey said on Thursday.

Banks like Barclays (LSE: BARC.L - news) and RBS (LSE: RBS.L - news) have been fined in total $6 billion for rigging the Libor interest rate benchmark, and allegations are now emerging that the foreign exchange market has been manipulated as well.

"This is a considerable dent to rebuilding bank capital," Bailey told a Bloomberg event.

Now (NYSE: DNOW - news) , when stress-testing banks to ensure they can survive any future shocks, regulators must consider any potential fines alongside other potential costs, Britain's top banking supervisor said.

The Bank is working closely with Britain's Financial Conduct Authority, which is probing the foreign currency allegations, to see what fines generally could be in the pipeline, he said, and added it was also keeping an eye on developments abroad.

"We have to read the direction of travel of other law enforcement authorities, particularly in the U.S.," said Bailey, who heads the BoE's Prudential Regulation Authority that supervises British banks.

U.S. authorities have just fined French bank BNP Paribas (Xetra: 887771 - news) nearly $9 billion for violating that government's sanctions against Sudan, Cuba and Iran, sparking sharp criticism in France and concern in Europe that watchdogs in the United States are going too far.

Bailey said he was not criticising law enforcement agencies for doing their job as no bank should be "too big to jail".

"But," he added, "We have to be very clear that actions are taken which do not undermine the stability of the financial system. There is very substantial contingency planning done around these things. We have to deal with the potential consequences of this."

NO "ONE SHOT" GAME

Bailey added it would not be enough for banks simply to comply with new minimum capital requirements, but rather that the "optimal" level of capital for each would depend on several factors - including how much liquidity a bank has, and what stress tests being carried out in the European Union, uncover.

"We are not in a one shot game," he said.

Furthermore, he said, asset quality reviews - a type of balance sheet check the BoE has undertaken at British banks and now underway at top euro zone lenders in a bid to draw a line under the currency area's debt crisis - were not foolproof.

"In the best of all worlds, supervisory initiated AQRs should not reveal anything that isn't already known. I will just say that experience shows that we are not there yet," he said.

Core capital levels will also hinge on banks having a cushion of debt that can be tapped if the lender is bust.

Bailey warned that unless the Financial Stability Board (FSB), chaired by BoE Governor Mark Carney, clinches a global deal forcing the world's biggest banks to hold "bail-inable" debt - bonds that can be tapped to cover losses if they go bust - those banks would have to hold more core capital.

Carney wants a deal for the Group of 20 economies (G20) to endorse in November to end banks being "too big to fail".

"I am optimistic. I think we are making good progress on that front," Bailey said.

He rejected criticism that stricter capital demands are making banks unable to lend or make money.

"There are many ways of making money banking. The core of it is lending and deposit taking," Bailey said.

(Reporting by Huw Jones; editing by Sophie Walker)