* Review terms finalised early 2014, year to complete
* Parliament to approve any recommendation before election
* Lawmakers push for faster, higher leverage ratio
By Huw Jones and Matt Scuffham
LONDON, Nov 26 (Reuters) - Britain's finance minister George Osborne has asked the Bank of England to decide whether it needs more powers to control banks' risk-taking.
His intervention is the latest sign that Britain is going beyond international banking rules to curb its financial sector after taxpayers paid billions of pounds to rescue several banks during the 2007-09 financial crisis.
The Bank's Financial Policy Committee can already shape the regulation of Britain's financial system. It has powers to force banks to hold more capital but has no direct say over a separate tool for reining in big banks' balance sheets, a so-called leverage ratio.
Global regulators, keen to make banks safer after the financial crisis, are focussing on this leverage ratio as a way to curb risk.
The ratio is due to come in from the start of 2018, but lawmakers, including Andrew Tyrie, chairman of the influential Treasury Select Committee, want the FPC to have the power to set bank leverage ratios immediately and at levels higher than the new international standards, part of a new bank regulation regime known as Basel III.
"Now is an appropriate time for the FPC to consider whether and when it needs any additional powers of direction over the leverage ratio," Osborne said in a letter to Bank of England Governor Mark Carney.
Osborne's action accelerates a review of possible FPC leverage ratio powers that had been anticipated at a later date.
The review would also have to show that implementing the leverage ratio faster or higher than the Basel accord would help UK financial stability, Osborne said.
In his reply, Carney agreed that the time was right for such a review and he expected the FPC would be able to complete it within 12 months.
Speaking to lawmakers in parliament later on Tuesday, Carney underscored the importance of leverage tools for policymakers.
"If I could pick one element that was essential to the performance of the Canadian banking system during the crisis it was the presence of a leverage ratio," he said.
The ratio measures the amount of capital a bank holds as a percentage of its assets (loans), without adjustments for risk. A leverage ratio of 3 percent, for example, means a bank can lend up to 33 pounds for each pound of capital it holds in reserve.
Tyrie welcomed the review. "That power will be an essential part of the bank's toolkit for improving the safety of the banking system," he said on Tuesday. "The bank's review will be about how the FPC will exercise that power, not whether it should request it."
Osborne was "open" to the Bank's review recommending implementation of the leverage ratio ahead of a globally agreed timetable, the letter said.
He also said Britain might need to set a baseline leverage ratio higher than a globally-agreed 3 percent level - some lawmakers want a ratio of at least 4 percent.
Anthony Browne, chief executive of the British Bankers' Association, said it was important that UK banking regulation was in line with international standards.
Other banking industry officials and opposition party lawmakers said Osborne's announcement was an attempt to head off some of the amendments being put forward on Tuesday to toughen up a bill on new banking rules.
Bankers said the review would add to regulatory uncertainty in the short-term although it would provide greater clarity once completed.
"It will, at the very least, help the UK banks understand what will be expected of them over a known time frame," said Kevin Burrowes, a financial services expert at consultant PwC.
Carney said the FPC would publish some "high-level considerations" on the role of the leverage ratio within the overall capital framework of UK banks in its bi-annual Financial Stability Report on Thursday.
The FPC will need to assess how the leverage ratio would affect the ability of banks to keep lending, Carney said.
The leverage ratio calculation treats all assets on a non- risk-weighted basis, meaning that a big home loans lender, could be penalised more than an investment bank that takes more risk.
Britain's financial regulator said in June that 2 of Britain's top 8 lenders - Barclays and Nationwide - fell short of a 3 percent leverage ratio.
Barclays had to raise 5.8 billion pounds ($9.39 billion) from shareholders to help plug the capital shortfall.
The Banking Reform Bill, which the coalition government sought to enact following the crisis, will be debated in Britain's upper house of parliament on Tuesday and Wednesday.