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* Banks call for level capital playing field for newcomers
* Newcomers should have cheaper access to payments system
* Local authorities should place deposits with new banks
* Regulation should be proportionate to size of bank
By Matt Scuffham
LONDON, June 23 (Reuters) - Britain should relax rules fornew banks to enable them to compete on a level footing withestablished lenders and stimulate competition in the industry,the country's banking lobby group said on Monday.
The British Bankers' Association (BBA) wants capitalrequirements for new banks to be less onerous and levels ofregulation more proportionate to the size of the institution. Italso recommended the industry's payments system be cheaper toaccess by new banks and that local authorities and governmentdepartments be encouraged to place deposits with them.
Banking reform is high on the agenda of Britain's politicalparties in the run-up to the 2015 election and many lawmakerssay a lack of competition contributed to some of the scandalsthat have hit banks in recent years and fanned public anger.
They include the mis-selling of loan insurance, Britain'smost expensive consumer scandal, which has so far cost banksmore than 20 billion pounds ($34 billion) in compensation.
Opposition Labour leader Ed Miliband has said he willconsider limiting the market share of big banks should his partycome to power.
The government last year gave Britain's PrudentialRegulation Authority, which monitors the safety and soundness ofbanks, a secondary objective to stimulate competition within theindustry, while Britain's new competition watchdog isconsidering investigating the industry. [ID::nL6N0M83HX]
Lawmakers are keen for new banks to break the dominance ofBritain's "Big Five" of Lloyds, HSBC, RoyalBank of Scotland, Barclays and Santander UK which account for more than three-quarters of lending.
The BBA's director of strategy, James Barty, said ministersand regulators should implement plans to support competitionwithin banking and encourage new banks to set up and grow.
"The best way to promote competition is by creating a morelevel playing field for players of all shapes and size. It'svital that we don't treat all banking markets as the same andintroduce rules, regulations and costs that smother changes thatare already driving competition," he said on Monday.
RISK
Britain's regulator unveiled sweeping changes last year andis expected to add more elements over the next year to helpreduce barriers to entry. It has reduced the amount of time ittakes an applicant to be granted a bank licence to within sixmonths from a year or more previously. About 20 applications are currently being assessed.
The regulator has also said capital requirements will belighter for the first three to five years as long as a new bankcan show deposits are insured and they are set up with fullrecovery and resolution plans set out in case they hit trouble.
Metro Bank became the first new high street lender to emergefor over 100 years when it was granted a bank licence in 2010.
TSB, which was last week spun off from Lloyds, has emergedas a credible challenger with 4.5 million customers, whileVirgin Money, owned by British entrepreneur Richard Branson andU.S. billionaire Wilbur Ross is expanding and will offerpersonal current accounts later this year.
Retailer Tesco's banking arm has also launchedcurrent accounts while other new challengers, such as Aldermoreand Shawbrook, have also opened for business, focused on smallbusiness lending.
Barty said challenger banks still have to put up morecapital on the same type of loans than the biggest high streetlenders do. Big banks have an advantage because they useinternal models which reduce the capital they need to set asidefor loans based on their past history. New banks have to treatall loans in the same way, meaning they have to hold morecapital against less risky lending such as low loan-to-value andlow loan-to-income mortgages than their larger rivals.
"What it basically forces the challengers to do is go up therisk curve. If you want to have a level playing field forchallengers you need to do something in that area," he said.
($1 = 0.5880 British Pounds) (Additional reporting by Steve Slater; Editing by Pravin Char)
