UPDATE 1-EU says will ease capital charge on small business bank loans

(Adds more detail from speech, context)

LONDON, July 12 (Reuters) - All bank loans to small businesses would in future be eligible for a reduction in capital charges, not just loans of up to 1.5 million euros ($1.66 million), under a proposal made by the EU’s outgoing financial services chief on Tuesday.

Capital charges - capital that banks must hold against loans in case of a default - were reduced for lending to smaller firms from January 2014 as part of efforts to lift the bloc’s sluggish growth, but only for loans up to 1.5 million euros.

That ceiling would now be scrapped, said Jonathan Hill who resigned as Britain’s member of the EU’s executive Commission following last month’s British vote to leave the EU.

“There will be no upper limit, and a capital charge reduction of 15 percent above 1.5 million euros,” Hill told the Bruegel thinktank in Brussels in a valedictory speech.

Changes in EU bank capital rules would need approval from EU states and the European Parliament but countries like Germany have already been calling for measures to boost lending to businesses.

Hill was setting out what were likely to be his final decisions before he steps down on July 16.

He has won plaudits from industry for his root and branch review of EU rules rushed through since the 2007-09 financial crisis.

Many of the financial rules being applied by the EU were agreed in principle at the global level first, such as by the Basel Committee of banking regulators.

Hill said several key reforms now needed a rethink.

“I believe that these sorts of issues are best addressed upstream with our international partners,” Hill said.

Trade finance loans should be excluded from calculations for the new leverage ratio for banks, he said.

The ratio is a broad measure of capital to a bank’s assets on a non-risk-weighted basis, but lenders say including all assets creates a disincentive to hold some assets.

“Trade finance loans are typically less risky than standard corporate loans,” Hill said.

The leverage ratio should also be changed to avoid a disincentive to clear financial derivatives that banks hold on their books, he added.

Regulators are putting pressure on banks to clear more of their derivatives to make markets safer and Hill’s comments echo concerns last week from the Bank of England, a Basel member.

“Again we’ve asked for these concerns to be raised with the Basel Committee,” Hill said.

His comments signal a growing determination in the EU to tweak rules that could crimp the flow of credit from banks and markets to the bloc’s economy - even at the risk of diverging from globally agreed norms. ($1 = 0.9019 euros) (Reporting by Huw Jones, editing by Susan Fenton and Adrian Croft)