UPDATE 2-Bank of England to ease rule for small lenders to boost competition

(Adds detail, comment)

By Huw Jones

LONDON, July 22 (Reuters) - Smaller banks will be given more
time to reach targets for issuing debt to shore up their
defences in a crisis, the Bank of England said on Thursday as it
seeks to boost competition in a banking sector long dominated by
a handful of lenders.

Banks are required to issue MREL, or minimum requirement for
own funds and eligible liabilities, which is a form of debt that
can be written down to absorb losses and avoid repeating the 137
billion pound ($188.6 billion) taxpayer bailout of lenders in
Britain during the financial crisis more than a decade ago.

The targets were set under European Union rules, which
Britain now can amend more easily after leaving the bloc last
December.

"Making it easier for firms to grow into MREL responds
directly to firms’ concerns about barriers to growth created by
the step up in MREL requirements as firms expand their balance
sheets," Bank of England Deputy Governor Dave Ramsden said in a
statement.

The central bank has authorised 27 new banks since 2013, but
Lloyds, Barclays, HSBC and NatWest
continue to dominate retail lending and the so-called
challenger banks have said that blunt thresholds for issuing
MREL create a "cliff edge" that holds them back from building
market share.

The BoE proposed replacing its indicative threshold of 15
billion to 25 billion pounds with a notice period setting out
when a lender can enter transition to its MREL targets if the
company grows beyond 15 billion pounds in total assets.

The central bank would assess a lender's business plan as it
approaches the 15 billion pound threshold and issue a bespoke
transition path.

"The banking industry must now assess the implications of
the new regime in terms of ability to compete, and highlight any
potential challenges to how they serve customers or change their
business models as a result," said Tom Groom, a financial
services partner at consultant EY.

The proposals for an extended transition path directly
respond to calls for change, the BoE's Ramsden said.

"They are inherently flexible and agile as they allow for a
further extension if unforeseen circumstances demand it,"
Ramsden said.

Challenger lenders Metro Bank, TSB and Co-op Bank
did not respond immediately to requests for comment.
($1 = 0.7264 pounds)

(Additional reporting by Iain Withers
Editing by Alison Williams and David Goodman)