By Huw Jones
LONDON (Reuters) - Britain's banks discover next week how much extra capital they need to keep regulators happy and how much of a head start new entrants in the sector will get.
The Bank of England's Financial Policy Committee, tasked with spotting system-wide risks, will announce on Wednesday the outcome of an inquiry into capital levels at British banks.
Britain's banking supervisor Andrew Bailey has been checking how banks tot up risks on their books to determine overall capital requirements.
He is concerned about inadequate provisions for losses on loans, and sceptical about capital figures the banks were coming up with using their in-house models.
Hefty compensation bills for mis-selling loan insurance, over 14 billion pounds ($21 billion) and rising, have also hit all four of Britain's biggest banks.
But the focus will be on Royal Bank of Scotland <RBS.L> and Lloyds <LLOY.L>, in which the government has stakes it would like to offload by the next election in 2015. Replenishing capital buffers is an important step in making them marketable.
UK lawmakers are also putting pressure on regulators to increase competition in a sector where four banks, Lloyds, RBS, HSBC <HSBA.L> and Barclays <BARC.L> hold 74 percent of deposits.
Analysts at Credit Suisse estimate that these four will need a total of 27 billion pounds of extra capital, though 11 billion pounds has already been raised since November when Bailey's investigation began.
Credit Suisse believes no bank will need to go cap in hand to investors and that shortfalls will be plugged by tapping discretionary capital buffers and retaining earnings, meaning limiting dividends and bonuses.
The Financial Services Authority is due to publish on Tuesday how it aims to make it easier for new banks to enter the market.
"There are quite a lot of barriers to entry, some of which derive from the regulator, some of which simply derive from the fact you are competing with people with 90,000 branches and ATMs all over the country," the FSA's managing director Martin Wheatley told reporters on Thursday.
"Clearly we want standards so we want some barriers, but we don't want them to be overdone," Wheatley said.
Elements of the new regime have already been revealed.
The watchdog's chairman Adair Turner has said new entrants would need a core capital buffer of 4.5 percent to start with, half of the 9.5 to 10 percent the big lenders must hold.
New entrants would be given several years to build up to 7 percent, though all banks must hold this amount by the end of 2018 under new EU rules.
Wheatley has said there will be a two-step authorisation process, starting with interim approval so that a new bank can start looking for a chief executive, obtain funding and invest in IT before it gets final authorisation.
Metro Bank became the first new high street lender to emerge for over 100 years when it was granted a banking licence in 2010. In a report published in January, Britain's consumer watchdog said the 2008 financial crisis and subsequent recession had weakened competition from smaller lenders and led to the established players becoming even more dominant.
The Office of Fair Trading said Britain's biggest retail bank Lloyds had almost twice the market share of the second largest current account provider, Royal Bank of Scotland. Santander UK <SAN.MC> is the biggest challenger to the 'Big 4' and now has an 11 percent share of the market.
($1 = 0.6588 British pounds)
(Additional reporting by Matt Scuffham; Editing by Ruth Pitchford)