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LONDON, Feb 24 (Reuters) - The Bank of England proposed on Friday to allow new banks to hold less capital from next January to help them win more market share from the "Big Four" lenders that dominate high streets.
The BoE's Prudential Regulation Authority (PRA) published proposals to "refine" its system of "Pillar 2A" capital requirements add-ons that top up the minimum requirements all lenders must hold.
"This consultation is a major step forward for the PRA in facilitating effective competition, reducing capital requirements for eligible small firms," PRA Chief Executive and BoE Deputy Governor Sam Woods said.
"This will be good for competition and for safety and soundness."
The government wants more competition in banking, a sector dominated by RBS, HSBC, Lloyds and Barclays.
"The Prudential Regulation Authority's consultation is a positive step in closing the gap between challengers and the big banks," financial services minister Simon Kirby said.
New banks have said they are penalised when it comes to setting aside capital to cover default risks from mortgages on their books.
The big banks can use their own models, vetted by regulators, to calculate how much capital they should hold to cover risks from home loans.
But the new banks typically use the "standard approach" set down by regulators, and which has less wiggle room.
Under the proposals, PRA supervisors could take into account the greater degree of conservatism that may apply to risks from some types of exposures, especially mortgages, when deciding how much add-on capital is needed.
The PRA would also apply rules now being finalised by global banking regulators to iron out differences between models and the standard approach, if they are passed. (Reporting by Huw Jones; Editing by Mark Trevelyan)