* Banks have until Jan 2015 to meet requirements
* Hapoalim, Leumi to raise core capital to 10 pct by Jan 2017
* Banks may resume dividends if can meet directives
* Banking index jumps 6.8 percent
(Recasts, adds details, comments from officials/analyst, share reaction)
By Steven Scheer
JERUSALEM, March 14 (Reuters) - Israel's banking regulator said it would give banks time to raise their core capital levels as part of the process of adopting international rules to strengthen the financial industry, sending shares in the sector soaring on Wednesday.
Under draft guidelines issued by the central bank's Supervisor of Banks, Israeli banks will have to hold core capital equivalent to at least 9 percent of their risk-weighted assets by January 2015. The regulator imposed an additional goal of 10 percent on Israel's two largest banks, Leumi (LUMI.TA) and Hapoalim (POLI.TA), but gave them until January 2017 to meet it.
Israel's current core capital ratio - a measure of financial strength - is 7.5 percent, with banks averaging about 8 percent.
UBS analyst Darren Shaw said he had expected an increase of core Tier 1 capital to 9 percent by the start of 2014. Investors also had concerns that banks would have to curtail lending, but the Bank of Israel said banks were expected to increase capital balances gradually while continuing to support economic growth.
"The core Tier 1 regulatory cloud which has led to the Israeli banks drifting lower and lower appears to be lifting," Shaw said, adding that although these were draft directives, it was likely they would be formally established.
Banks will also be allowed to distribute dividends as long as doing so does not negatively impact their ability to meet the new requirements, the Bank of Israel said. Banks had largely put off paying dividends until the capital directives were issued.
"We could see banks begin considering dividends in a few years, possibly earlier in some cases," Shaw said.
The Tel Aviv banking index <0#.TELBANK> jumped 6.8 percent in afternoon trade to 970.98, with some bank shares up as much as 8.4 percent. The index hit a year low of 896.16 on Monday.
Optimism in bank stocks pushed the blue-chip TA-25 index .TA25 up 3 percent.
The new Basel III capital rules call for a core Tier 1 capital adequacy ratio of at least 7 percent starting in 2013, as regulators across the world pressure banks to build up their capital muscle in a bid to prevent a repetition of the 2008 financial crisis. Full implementation is expected by 2019.
Israel's central bank said the ratios and their timetables for implementation took into account the Basel Committee's recommendations and guidelines of supervisory authorities abroad, as well as the actual level of core capital levels in Israel.
They were also based on the banks' risk structure and environment in which the banking system operates and banks' ability to increase their capital adequacy and to continue to supply credit for the support of economic activity.
"This is an additional essential step in the strengthening of the banking system and supporting the stability of Israel's financial system. It is a measured step which allows continued growth of credit and of the economy," Bank of Israel Governor Stanley Fischer said.
(Editing by Mark Potter)
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