Barclays stance on capital rules tests ties with regulator By Steve Slater LONDON (Reuters) - Barclays' (BARC.L) promise to have a model relationship with industry regulators is already being tested as the bank tries to fend off pressure to meet stricter capital requirements without reining in lending. The Bank of England delivered a quick and sharp response on Friday when Barclays Chief Executive Antony Jenkins said he may have to cut lending to UK households and companies if he is forced to meet a 3 percent leverage ratio quickly. The BoE said it had made it "very clear" that any plans that restrict lending would not be accepted. The leverage ratio measures a bank's capital against total loans. A higher ratio makes it less vulnerable to the kind of sharp drop in asset values that pushed some lenders to seek government bailouts during the financial crisis. Barclays has had testy relations with banking regulators for years. While it avoided a state rescue during the crisis, its investment banking arm is often a target for critics of a free-wheeling banking culture which they say puts short-term gain before the interests of clients and the wider economy. Jenkins' predecessor Bob Diamond was ousted in 2012 after Barclays was fined $450 million for rigging Libor interest rates and Jenkins said in April he wanted his bank "to become a model of constructive engagement with regulators." The BoE's new Prudential Regulation Authority (PRA) told banks last month they must have a 3 percent leverage ratio and that Barclays fell short with a ratio of 2.5 percent after adjustments. Mutual Nationwide was the only other lender to miss the target. Jenkins said on Friday he expected to reach agreement with the PRA in the next four weeks. But he also questioned the PRA's approach, saying the leverage ratio was a "crude" measure and should only be used to supplement a capital measure based on how risky assets are perceived to be, or risk-weighted assets. His comments suggest Barclays will take a tough approach in the discussions with the regulator in the next two weeks. Robert Jenkins, a former member of the BoE's Financial Policy Committee, said Barclays has many options to reduce its leverage, including cutting costs, raising equity or paying less in bonuses. The taxpayer should worry that this systemically important financial institution continues to sail close to the wind. Its board should worry that its CEO is happy to do so," Jenkins said in a letter in the Financial Times on Monday. Barclays had to submit its plan to meet the target by Sunday. The PRA will report publicly on whether it is acceptable or needs to be revised. Barclays said in a presentation last week that its investment bank would continue shrinking and reshaping to improve returns and cut risk. Based on Barclays' total assets of 1.6 trillion pounds, it would need to find 7-8 billion pounds of extra capital to lift its leverage ratio to 3 percent from 2.5 percent. The bank has already said - and the PRA has accepted - it can find at least 3 billion pounds of capital, indicating it could need to find 4 billion more. Alternatively, it could shed 133 billion pounds of assets, or 17 percent of its balance sheet, analysts at Deutsche Bank estimated. Many bankers argue that the leverage ratio is too simplistic a measure and penalizes low-risk, high-volume businesses such as trade finance and mortgage lending. Britain is moving early to introduce a leverage ratio - a 3 percent cap is due to come in under global rules in 2018 - but other countries may also introduce it ahead of time. Khalid Krim, head of capital solutions EMEA at Morgan Stanley, said banks would have to issue more capital. This is all going to be a long-drawn out process though. The market has to give banks and regulators time to adjust, and banks are not going to be under imminent pressure to raise capital," he said. Andrew Bailey, head of the PRA, is expected to be quizzed on the issue when he appears before UK lawmakers on Tuesday. Additional reporting by Natalie Harrison at IFR; editing by Tom Pfeiffer