UPDATE 1-BoE seeks more level mortgage playing field for small banks

(Adds detail)

By Huw Jones

LONDON, July 22 (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, RBS and
Barclays, 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' 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.
(Reporting by Huw Jones, editing by Louise Heavens and John
Stonestreet)