* BoE says quality of home supervisor a major consideration
* Branches must have convincing wind-up plans in crisis
* New policy to apply to new and existing branches
* BoE expects only a handful of branches to exit at most
* Most retail branches likely to become subsidiaries
By Huw Jones
LONDON, Feb 26 (Reuters) - Britain's central bank set lighter conditions on Wednesday for branches of Chinese and other non-European investment banks as part of efforts to bolster London's role as a financial centre.
The new rules reverse a previous policy of putting pressure on non-EU lenders operating branches in Britain to become standalone subsidiaries with their own capital and liquidity buffers - a costlier undertaking.
The initial target of the new policy is China but it would apply to lenders from any non-EU country, Andrew Bailey chief executive of the Bank of England's (BoE) regulatory arm, the Prudential Regulation Authority (PRA), said in October.
Britain is hoping the City will become a major yuan hub outside China and both countries are already holding talks about setting up a clearing bank in the British capital for the Chinese currency.
The PRA said in October it proposed allowing foreign banks to operate as more lightly regulated branches as long as they do not take deposits.
That policy followed Britain's bruising experience with savers losing money when Iceland's banking system collapsed in 2008 at the height of the financial crisis.
Britain had to compensate deposit holders in the UK and is suing Iceland to get the money back.
The rules, which the BoE put out to public consultation on Wednesday, stipulate that any non-European investment or retail bank can operate as a branch only if they meet three criteria, stopping short of a ban on non-European retail branches.
Branches must have an equally strict home supervisor, insure deposits with a UK scheme, and prove it can be wound up quickly in a crisis while maintaining access to deposits.
"Resolution will be a key deciding factor in the PRA's judgements and is ultimately where it will place most emphasis when forming a view on its risk appetite towards branches operating in the United Kingdom," the BoE paper said.
There are 145 branches of international investment and retail banks in Britain, accounting for 31 percent or 2.4 trillion pounds ($4 trillion) of assets in the country's banking system, equivalent to 160 percent of economic output.
The regulation might bring new non-European branches to Britain, causing some minor effects on competition, the BoE consultation paper, detailing the policy for new and existing branches, said.
There will also be new rule requiring all non-EU lenders, whether deposit-taking or only non-retail, to report data on a regular basis to the PRA by 2015.
"The purpose of the twice yearly return is to enhance the PRA's understanding of the potential impact that branches could have on UK financial stability," the paper said.
A limited number of the foreign branches will have to meet the data request this year to assess the rule's practicability.
The division of responsibilities between the PRA and a bank's home supervisor will be set out in bilateral agreements.
If a bank cannot meet the requirements to be or remain a branch, then it would have to become a subsidiary.
It estimated that for a branch with total assets of under 2 billion pounds, there would be a one-off cost of 525,000 pounds and ongoing costs of 150,000 a year to become a subsidiary.
The PRA expects most existing non-European retail branches, which take deposits, to become subsidiaries with a handful at most getting out.