UPDATE 2-Britain eases rules for start-up banks

* New start-ups could begin trading within 6 months

* Reduced capital requirements for first 3-5 years

* MP Tyrie says review is 'step in right direction'

* Aldermore CEO says plan ensures 'level playing field'

By Huw Jones and Matt Scuffham

LONDON, March 26 (Reuters) - Start-up banks in Britain willnot need as much capital as their established rivals startingfrom April, Britain's Financial Services Authority (FSA) said,in a move to boost competition.

Under pressure from lawmakers to increase choice in a sectordominated by four banks, the FSA unveiled sweeping changes toauthorise new entrants within six months, a process thatcurrently takes a year or more.

Capital requirements will be lighter for the first three tofive years as long as a new bank can show deposits are insuredand that it can be wound up easily without destabilisingmarkets.

Additional requirements that were previously applied tocover uncertainties in start-up firms will be scrapped.

A new bank will need a core capital buffer equivalent toonly 4.5 percent of its risk-weighted assets, a level that willbe increased as the bank expands.

This is well below the 7 to 9.5 percent that applies toBritain's "big five" lenders with 83 percent of retail accounts- HSBC, Barclays, Lloyds, RBS and Santander UK.

There will also be reduced liquidity requirements, the FSAsaid on Tuesday.

"This has been a comprehensive review and we have made somebold changes, ones that respond to the difficulties faced byapplicant firms," FSA Chairman Adair Turner said in a statement.

"We believe the changes will make a significant differenceto the ease with which new firms can enter the UK banking systemand, as a result, enable an increased competitive challenge toexisting banks," Turner added.

Andrew Tyrie, who heads a committee of lawmakers examiningstandards within the industry, said the FSA's plans appeared tobe a step in the right direction.

"The lack of competition in banking has been reinforced by aregulatory regime favouring large incumbents. Customers havelost out as a result," he said.

The Parliamentary Commission on Banking Standards willpublish its own proposals for stimulating competition in itsfinal report due in May.

NEW LENDERS ALREADY EMERGING

New entrants have already begun to surface in the wake ofthe 2008 financial crisis, looking to fill the gap as the bigbanks focus on shrinking their balance sheets and building upcapital reserves to meet new regulations.

Metro Bank became the first new high street lender to emergefor over 100 years when it was granted a banking licence in2010. Other new challengers such as Aldermore and Shawbrook havealso emerged but have opted not to open branches.

Philip Monks, chief executive of Aldermore, said theinitiatives would make applying for a banking licence lessonerous and would help new banks compete effectively.

"I think it's good to see more banking competition, and Ithink it's good to give start-up banks more certainty in theprocess and to streamline the process," Monks said in aninterview.

"It's all very well to have a number of new banks in themarketplace, but when they do get into the market, what you needto do is ensure that they have a level playing field," he added.

Aldermore was founded in 2009 with backing from privateequity firms AnaCap and Morgan Stanley Alternative InvestmentPartners. Its loan book now totals over 2 billion pounds, and itis the sixth-largest lender in the Bank of England's Funding forLending Scheme (FLS), which provides cheap funds for lending tosmall firms and households.

New entrants still face a big challenge in taking onexisting lenders, which have branches across the country andwhose payment systems the start-ups still have to use.

The Bank of England's director of financial stability,Andrew Haldane, has mooted a common payment systems platformthat all banks could use to level the playing field forentrants.

The changes are among the FSA's last policy announcementsbefore the regulator is scrapped on March 31.

Approval of new banks will be shared by two new regulatorsfrom April 1, with the standalone Financial Conduct Authorityhandling authorisation of staff and the Prudential RegulationAuthority at the Bank of England overseeing capitalrequirements.