* UK banks still 'too big to fail', says Carney
* Regulatory changes to take years to have effect
* Carney guarded over end to post-crisis 'bank levy'
By Huw Jones
LONDON, July 14 (Reuters) - Almost seven years after the collapse of Lehman Brothers sparked mayhem in markets, regulators are still years away from being able to wind down a major failed bank at no cost to taxpayers, the Bank of England said on Tuesday.
Lehman's demise in 2008 spawned new rules to make it possible to let a bank fail without calling on taxpayers or causing widespread damage to the economy.
"We have many more options in terms of what would happen were an institution to fail, but I can't sit here today and tell you that the largest banks are resolvable today," BoE Governor Mark Carney told parliament's Treasury Select Committee.
Only once further regulation takes effect in five years' time will Britain be close to a solution, Carney said.
British banks will have to ring-fence their retail arms with extra capital from 2019, and from 2020 they must hold extra bonds that can written down or 'bailed in' during a crisis.
"It won't be until we have the capital structure fully in place, the 'bail in-able' debt. There is still work to be done," Carney said.
The current situation offered big banks a competitive advantage, Carney said. Big banks benefit from cheaper funding than their smaller rivals because credit rating agencies and markets believed governments would bail them out to avoid what happened with Lehman.
British finance minister George Osborne announced last week that he would substantially phase out a levy imposed on banks to make them pay for taxpayer support during the financial crisis, though a new surcharge on banks' profits will be introduced.
Given that big banks cannot be resolved yet, Carney was asked if withdrawing the levy was premature.
"I don't think that necessarily it is," Carney replied, in a guarded response. Britain's finance minister George Osborne had "long been aware" of his views about the levy, Carney said.
Carney also told lawmakers that the need to make banks resilient to cyber attacks was a major priority for the FPC.
Britain's five biggest banks have voluntarily completed resiliency tests using a BoE blueprint and the central bank wants 35 financial firms and market operators in total to take the test, Carney said.
BoE Deputy Governor Jon Cunliffe told lawmakers that if firms showed any reluctance to using the blueprint then the central bank would consider making it mandatory. (Additional reporting by David Milliken)