By Matt Scuffham

LONDON (Reuters) - State-backed British lenders Lloyds Banking Group and Royal Bank of Scotland have agreed plans to shore up their capital with the financial regulator, removing a barrier to the government offloading its shares.

The regulator said on Wednesday it had finalized capital requirements for the two banks and that the lenders had submitted their plans. Both banks said they did not need to issue new equity and could raise the necessary capital by selling assets and via restructuring plans already under way.

The banks need to show they are robust enough to return to private ownership after Britain pumped in a combined 66 billion pounds ($100 billion) to rescue them during the 2008 financial crisis. Both have since undertaken major restructuring, including asset sales and job losses, under new management.

"Having refocused their business, now is the time for a clear strategy on how to return RBS and Lloyds to the private sector in a way that protects value for the taxpayer," Finance Minister George Osborne said on Wednesday.

Osborne indicated he would await the final recommendations of the Parliamentary Commission on Banking Standards, due to be made next month, before formulating plans.

Speculation that a sale of Lloyds shares may be imminent has risen in recent weeks after the bank's shares passed the 61.2 pence level which the government regards as break-even on its 20.5 billion pound investment.

A sale of shares in RBS would appear to be further away with taxpayers still sitting on a loss of over 5 billion pounds following the bank's 45.8 billion bailout. However, the government may consider other options such as a mass share distribution to the public.

The Bank of England said in March that Britain's banks must raise 25 billion pounds of extra capital by the end of the year to absorb any future losses on loans and said the Prudential Regulation Authority (PRA) would give banks specific guidance on their capital position by the end of May.

Industry sources and analysts had identified Lloyds and RBS as most likely to need extra capital. Lloyds was seen facing a shortfall of up to 5 billion pounds and RBS as much as three times that amount.

Neither the banks nor the PRA would confirm how much extra capital the banks needed. Shares in RBS and Lloyds were up 1.7 and 1.2 percent respectively at 1315 GMT.

STILL SLIMMING DOWN

Lloyds, which is 39 percent-owned by UK taxpayers, said it would not need to issue new equity or so-called contingent capital, which can convert into equity if market conditions markedly deteriorate.

The bank, which was informed of the PRA's conclusions by letter this week, said it expected to meet additional capital requirements by generating cash from its core business and through the disposal of non-core assets.

Lloyds has hired advisers for the possible sale of its Scottish Widows asset management arm and sold a 20 percent stake in wealth manager St James's Place, leaving it with a 37 percent stake which it could offload at a future date.

The bank is selling off non-core loans - those not deemed to fit with its long-term strategy - and has a target to offload at least 20 billion pounds worth of non-core assets this year. It is also reducing the size of its international business.

RBS, which is 81 percent-owned by taxpayers, has more to do.

The bank said it expected to improve its capital position and meet regulatory requirements through its current business plan. However, it warned it would not be able to implement all of the measures this year.

RBS is reducing the size of its investment bank, selling non-core assets and plans to sell 20-25 percent of U.S. arm Citizens in the next two years through a stock market flotation in New York.

The PRA said it would release more information when it had concluded discussions with all banks. The other major UK banks are not expected to need capital and all generate significant profits. HSBC and Standard Chartered are regarded as among the best capitalized banks in the world and Barclays has said it is comfortable with its strength.

Britain's biggest customer-owned financial services group Nationwide said on Wednesday it planned to raise a "few hundred million" pounds in the next year to bolster its capital through the issue of new loss-absorbing debt.

($1 = 0.6604 British pounds)

(Additional reporting by Steve Slater; Editing by Sinead Cruise and Mark Potter)

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