BoE to help smaller lenders compete better in mortgage market

By Huw Jones

LONDON, Oct 22 (Reuters) - The Bank of England will help newlenders cut how much capital they have to set aside to coverdefaulting mortgages so they can compete better with theirbigger rivals, a top BoE official announced on Thursday.

Britain's government is keen to increase competition inbanking, a sector where just four lenders, HSBC, Lloyds, RBS andBarclays make up 77 percent of high street accounts and dominatemortgage lending.

UK finance minister George Osborne has given the Bank ofEngland, whose Prudential Regulation Authority regulateslenders, a new, extra remit to boost competition.

BoE Deputy Governor and PRA Chief Executive Andrew Baileysaid that one way to fulfil this remit will be to help new bankscompete better in offering home loans.

Currently, large banks like HSBC and Barclays can use theirown models for calculating how much capital to set aside againstmortgages. Smaller lenders must use a method set out byregulators, known as the standard approach.

In-house models are more sensitive to risks than thestandard approach and come up with a lower capital requirements.

"The consequence of this is that smaller banks and buildingsocieties cannot compete effectively in lower risk asset marketssuch as prime mortgages because the capital requirements are toofar apart and in favour of large banks," Bailey told a financialservices audience.

"This forces them into riskier assets and undermines theirposition."

The Bank is taking a twin-track approach: seeking topersuade the European Union to change its bank capital law toease the burden on smaller lenders; and in the meantime helpsmaller lenders get approval to use their own models formortgages.

"We welcome internal model applications by smaller banks andwe will do what we can to help them meet the required prudentialstandards, which are largely set out in the EU legislation,"Bailey said.

Brussels has begun a consultation on reviewing its bankcapital rules to see whether changes could be made to helplenders provide more funds for the economy.

The BoE has told the EU it wants a more tailored approach tocapital requirements at smaller lenders.

"This is an important issue, and one that matters if we areto have growing challenger banks," Bailey said in reference to anew generation of lenders like Virgin, Metro, Aldermore andAtom.

The move will help soften the blow of a new industry-widesurcharge on profits from next year.

The PRA has authorised ten banks in the last two years, andhas a "substantial" pipeline of interested parties, Bailey said.

(Reporting by Huw Jones; Editing by Elaine Hardcastle)