Bank of England creates capital buffer for banks to absorb losses

(Adds more detail)

LONDON, July 29 (Reuters) - The Bank of England has made changes to the way banks hold capital above the mandatory minimum in an effort to increase transparency and better absorb losses in the event of a financial shock, such as a housing market crash.

The BoE's Prudential Regulation Authority (PRA), which supervises banks, is creating a capital buffer that will be determined by a bank's scorecard in the central bank's annual resiliency or stress test for major lenders.

If the PRA judges a bank's risk management and governance are weak, it may set the buffer to cover the risk until it is dealt with, the BoE (Shenzhen: 000725.SZ - news) said in a statement.

Since the financial crisis forced governments in Britain and elsewhere to shore up lenders, regulators have been making greater use of their powers to impose add-on capital charges under the so-called Pillar II requirements.

This is separate from Pillar I, which refers to the core, mandatory capital minimums to cover basic risks on a bank's book, such as from loans not being paid back.

"Firms must hold adequate capital to support the risks in their business, ensuring financial stability and continuity in the provision of key services to the wider economy," PRA Chief Executive, Andrew Bailey, said in a statement on Wednesday.

"Pillar II capital requirements play an important role in ensuring firms have adequate capital and are a valuable tool for implementing the PRA's forward-looking judgement based supervisory approach," Bailey said.

The changes take effect from January 2016 and follow a public consultation earlier this year.

The final rules are largely in line with a consultation paper that said major banks in Britain will likely see a slight increase in capital add-ons.

(Reporting by Huw Jones; Editing by Carolyn Cohn and Louise Heavens)