UPDATE 1-New UK banks could get leeway over capital

Wed Oct 24, 2012 12:02pm EDT

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By Huw Jones

LONDON Oct 24 (Reuters) - New UK banks would be treated more leniently over capital rules by showing that customer deposits would be handed back quickly in a crisis, Britain's top banking supervisor said on Wednesday.

Andrew Bailey, head of banks supervision at the Financial Services Authority, said the UK banking sector remains very concentrated because, unlike in the United States, very few lenders leave the market.

Barriers to entry were set very high in the past because there was no mechanism for winding down troubled banks quickly and without disrupting the market.

Since the 2007-09 financial crisis, such a mechanism has been put in place along with stronger protection for customers' money so that any deposit up to 85,000 pounds is protected.

Britain's government wants more competition on the high street where just four banks dominate: HSBC, Barclays , Lloyds and RBS. New entrants such as Aldermore and Metro Bank have yet to make large inroads.

"We are prepared to lower the entry barriers to new banks in this country and we have already done that in one or two cases," Bailey told a financial industry conference.

New entrants that can show how much each customer has in deposits and have workable resolution plans would get leeway on how much capital they should hold initially, Bailey added.

Britain was "on the way" to having a clear public understanding that deposits up to 85,000 pounds were safe whatever happened to the bank, a condition for giving customers the confidence to switch lenders, Bailey said.

UK financial services minister Greg Clark told the conference that protecting depositors was of the utmost importance after the queues of people trying to withdraw their savings from Northern Rock in 2007.

It was Britain's first bank run in a century.

Clark said the government will reinforce protection of depositors from 2019 by changing the law to introduce so-called depositor preference, meaning if a bank goes bust, bank creditors would be hit before depositors.

Britain's position clashes with a draft European Union law on dealing with failing banks which proposes giving bondholders similar or better protection to deposit guarantee schemes in an insolvency.

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