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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 final EU
departure
(Updates with Bailey comments on financial sector jobs)
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 grapples
with the COVID-19 pandemic and braces for any market disruption
from a big change in the UK's trading relationship with the
European Union.
Governor Andrew Bailey said the central bank had done all it
could 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.
The BoE ramped up market liquidity auctions at the start of
the pandemic, as well as cutting interest rates to a record low
and restarting its asset-purchase programme.
Market disruptions would not threaten financial stability,
but Bailey warned that some EU customers might be unable to
access British financial services because the EU had 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-recognised trading venues, the BoE said.
"Financial institutions should continue taking measures to
minimise disruption," it said.
Prime Minister Boris Johnson said on Thursday that there was
a "strong possibility" that a post-Brexit transition period
would end on Dec. 31 without a deal to avoid tariffs on British
exports to the European Union.
Bailey said he was confident London would continue to be one
of the world's leading financial centres, and said job losses in
the sector had been much smaller than some people had feared at
the time of 2016's Brexit referendum.
'SYSTEM HAS RESILIENCE'
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 BoE added.
"Our message today is that the financial system has the
resilience to go on doing that," Bailey said.
On Thursday, the BoE announced it would allow banks to
restart paying dividends and executive bonuses.
Banks would face challenges next year from higher
unemployment and business insolvencies but were well prepared
and could absorb losses of up to 200 billion pounds ($265
billion), 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 would not relax regulatory
standards, whatever the outcome of post-Brexit trade talks.
However it plans to review limits on mortgage lending, first
established in 2014, to see if they were still appropriate in an
environment of lower long-term interest rates.
($1 = 0.7560 pounds)
(Additional reporting by Andy Bruce and William James; Editing
by Pravin Char)
