* Carney says no mission accomplished in fixing banks
* Regulators give banks more flexibility over cash buffers
By Huw Jones
LONDON, Aug 28 (Reuters) - Britain's eight top lenders can cut their cash reserves by a collective 90 billion pounds ($140 billion) and use the funds to support economic growth, the Bank of England's new governor Mark Carney said on Wednesday.
Britain's lenders were forced to build up buffers of cash and UK government bonds far earlier than required under a globally-agreed timetable.
The buffers help cushion them from short-term market shocks so they can keep operating for a month even if markets freeze, as they did during the 2007-09 financial crisis.
UK government bonds, known as gilts, fell after Carney's announcement as investors factored in the likelihood that the banks will sell off some of their holdings.
Carney, in his maiden speech as governor of the Bank of England, said it "will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy".
In a separate statement, the central bank's Prudential Regulation Authority, which supervises UK lenders, said banks could scale back the liquidity buffers on condition they have a separate, minimum core capital ratio of 7 percent - a new requirement.
The watchdog has said it expects the lenders to meet this capital ratio by the end of the year after some had to take steps to find more capital.
The eight are: HSBC, Barclays, Co-op, Lloyds, RBS, Standard Chartered, Santander UK and Nationwide.
The PRA is implementing a policy that the BoE's Financial Policy Committee decided on in June. The policy would allow the four biggest banks to scale back their liquidity buffers to 80 percent of where they should be if in full compliance with the global Basel III accord, not due until 2018.
This would release 70 billion pounds but, by extending the change to the eight main lenders, a further 20 billion pounds can potentially be released.
The British Bankers' Association said banks would be re-assessing how much of the 90 billion pounds can be redeployed into lending to small and medium businesses and households, as they are committed to doing.
NO MISSION ACCOMPLISHED
The banks are under political pressure to increase lending to business following criticism that they are focusing on home mortgages and consumer credit rather than productive industry, encouraging a lop-sided economic recovery.
The banks argue that lending levels reflect the amount of demand.
Carney signalled that banks face having to hold more capital against mortgages if house price growth becomes unsustainable.
Like his predecessor Mervyn King, he insisted that well-capitalised banks are in a better position to lend, saying U.S. banks have rebuilt their capital bases and now lend far more than their British peers.
But Carney avoided some of King's harsh rhetoric towards the British banks, striking a more conciliatory tone that was welcomed by Philip Hampton, chairman of Royal Bank of Scotland, during a visit to Reuters.
"Most people like Mark Carney and they think they can do business sensibly with him," Hampton said.
Britain's banks will face further capital requirements because of their size or market dominance, but Carney said his task would be to manage this transition "in a gradual way that supports continued confidence in growth".
With a 7 percent core capital ratio, banks would be "adequately capitalised" to start that transition, he said.
"There is no mission accomplished banner that the banking system is fixed," Carney added.
Banks have been using cash and top-quality government bonds such as UK gilts in their liquidity buffers. The PRA said on Wednesday that up to 40 percent of the buffers could in future be in corporate bonds, shares and retail mortgage-backed securities, giving them greater flexibility.
$1 = 0.6435 British pounds)