By Huw Jones
LONDON (Reuters) - The Bank of England may introduce more flexible rules on the capital that small banks must set aside against mortgage loans, to help them compete better in a sector that has long been dominated by Britain's big lenders.
Big banks can use their own models to determine how much to set aside against mortgage defaults, while smaller lenders must use the regulator's guidelines, which typically means holding more capital.
A simpler but still robust capital regime for smaller banks could promote competition, Sarah Breeden, the BoE's executive director for UK Deposit Takers Supervision, said.
"We are considering, in particular, whether there might be scope to introduce a new regime for smaller banks following Britain's departure from the European Union," Breeden said.
Her comments came in a speech released on Wednesday, as the central bank published a consultation paper setting out a more defined regulatory approach to new and growing banks, such as simpler capital calculations.
Of the 22 new banks authorised since 2013, many seemed to have underestimated what was needed to become successful, Breeden said, adding that 20 more potential UK start-up banks were in the pipeline.
Challenger Metro Bank is being investigated by the BoE over an accounting scandal.
None of the new arrivals threaten HSBC, Lloyds (LON:LLOY), RBS (LON:RBS) and Barclays (LON:BARC), the four major banks that dominate mortgages, deposits and business loans in Britain.
Breeden said the BoE had been reviewing how to reduce the "unwarranted benefits" of using models, including "the desirability of mortgage risk weight floors."
Not all banks want to become a big player given the extra regulatory requirements they would face.
The UK arm of Goldman Sachs (NYSE:GS)' Marcus digital bank closed to new business in June to avoid reaching a threshold that would force it to become a separate, ring-fenced entity, a costly undertaking.