* RBS shares fall, seen facing biggest capital shortfall
* Big banks must meet Basel III by Dec, five years early
* Shares in HSBC, Barclays, Lloyds firmer
* Banks face regular stress tests from 2014
By Huw Jones and Matt Scuffham
LONDON, March 27 Britain's banks must raise 25 billion pounds ($38 billion) of extra capital by the end of the year to absorb any future losses on loans, the central bank said, less than investors had expected.
Replenishing banks' capital buffers, decimated by the financial crisis and heavy fines for misconduct, is a crucial step for returning part state-owned lenders RBS and Lloyds to full private ownership by the 2015 general election.
Bank of England Governor Mervyn King said the move announced on Wednesday to strengthen banks should also allow them to lend more and support economic growth.
He said plugging the capital shortfall was "manageable" and the banks won't need taxpayers' money.
But UK business minister Vince Cable said forcing banks to raise capital will prolong the time it takes for the economy to recover by further depressing already weak lending to small businesses.
The central bank said major lenders should achieve a core tier 1 capital ratio - a bank's main benchmark of health - of at least 7 percent of their risk-weighted assets.
RBS and Lloyds and two other banks, HSBC and Barclays, dominate the market with 74 percent of deposits.
Banks have already announced some plans to bolster capital which, along with their expected earnings this year, should cover half of the required 25 billion pounds.
The amount they have to raise is less than investors had expected. The central bank said last year the figure could be as high as 60 billion pounds.
Shares in RBS were down 2.6 percent while Lloyds jumped 2.8 percent, with Barclays up 0.6 percent and HSBC flat. The UK stock market was down 0.1 percent.
"You can pretty much guess HSBC is going to be in surplus and that Barclays, RBS and Lloyds have probably got a shortfall and I would guess the shortfall is probably biggest at RBS," Shore Capital analyst Gary Cooper said.
The central bank did not give a breakdown of how much each bank needed to raise.
Banks are expected to say how they will raise the money in the next few weeks. Analysts expect them to continue with measures such as curbing dividends and bonuses and selling assets, although some new capital may be needed.
Banks will have to hold a set amount of capital so they are not tempted to cancel loans to bump up their capital ratios.
Those holding large amounts of risky commercial property or are exposed to struggling euro zone countries such as Greece or Spain will have to hold even more capital above the 7 percent target.
RBS said its capital position was strong and that it was working with regulators, while Barclays said it was "profitable, strong and well-capitalised".
Santander UK said it would continue to maintain its capital ratios above the industry average.
HSBC and Lloyds declined to comment.
Wednesday's announcement outlined two phases: the December deadline for the minimum capital level, five years earlier than the globally agreed timetable under the Basel III accord, and regular stress testing of banks beyond 2014 that will lead to further capital increases.
The big banks are expected to have capital ratios of 10 percent by the end of 2018.
Andrew Bailey, chief executive of the Prudential Regulation Authority, the UK's new banking supervisor from April 1 when the Financial Services Authority is scrapped, will meet banks individually after Easter to vet their plans.
From April, the central bank's Financial Policy Committee, tasked with spotting broader risks in the financial system, has the power to direct regulators to force banks to comply with requests to bolster capital.
Bailey began his checks on how banks calculate risk on their books to determine overall capital requirements last November and has expressed concern about inadequate provisions for losses on loans.
All four of Britain's biggest banks have been hit with fines totaling more than 14 billion pounds so far for mis-selling loan insurance, putting further strain on capital.
UK lawmakers are also putting pressure on regulators to increase competition in a sector.