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* BoE to hold banks' counter-cyclical capital buffer at zero
* BoE says UK lenders can withstand 200 billion pounds of
losses
* Pandemic, post-Brexit transition pose downside risks to
economy
* Financial market volatility a risk ahead of Jan. 1
(Adds news conference)
By David Milliken and Huw Jones
LONDON, Dec 11 (Reuters) - The Bank of England took steps on
Friday to keep banks lending through 2021 as Britain copes with
the COVID-19 pandemic, saying it was ready to deal with any
market disruption from a big change in the UK's trading
relationship with the European Union.
Governor Andrew Bailey said Britain had done all it can to
mitigate risks from a no-deal departure from the EU on Dec. 31,
and it was ready to deal with any disruptions to financial
markets.
"What has the Bank of England got in its armoury, as it
were? The answer is a lot. We will use our tools, as we did in
March, should we be in that situation," Bailey told a news
conference.
Market disruptions would not threaten financial stability,
but Bailey warned that some EU customers might not be able to
get access to UK financial services because the EU has not taken
mitigating action.
"There is a limit to what we can do," Bailey said.
Market volatility could be reinforced by some derivative
users not being fully ready to trade with EU counterparties or
on EU or EU-recognised trading venues, the BoE said.
"Financial institutions should continue taking measures to
minimise disruption," it said.
The central bank said the counter-cyclical capital buffer -
extra money banks must set aside during economic good times -
would be held at zero until at least the last quarter of 2021.
Banks would not need to implement any future change until
the end of 2022, and should use this flexibility to underpin
lending to the rest of the economy, the Bank of England (BoE)
said.
On Thursday, the BoE announced it would allow banks to
restart paying dividends and executive bonuses.
"Our message today is that the financial system has the
resilience to go on doing that," Bailey said.
Banks would face challenges next year from higher
unemployment and business insolvencies but were well prepared,
the BoE said.
"The major UK banks can absorb credit losses in the order of
200 billion pounds, much more than would be implied if the
economy followed a path consistent with the Monetary Policy
Committee's central forecast," the BoE said.
The BoE forecast last month that Britain's economy would
shrink by 11% this year as a result of the pandemic and grow by
7.25% in 2021, taking until the first quarter of 2022 to return
to its pre-crisis size.
Unemployment was expected to peak at 7.8% in the second
quarter of next year.
The BoE also reiterated that it did not plan a post-Brexit
relaxation of financial standards.
"Irrespective of the particular form of the UK's future
relationship with the EU ... the Financial Policy Committee
remains committed to the implementation of robust prudential
standards in the UK," it said.
(Writing by David Milliken, editing by Andy Bruce and Mark
Potter)
