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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 detail)
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 deals with
the COVID-19 pandemic and a big change in its trading
relationship with the European Union.
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.
"Cutting support to the economy to avoid the use of capital
buffers would be costly for the wider economy and consequently
for banks themselves," the BoE 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," it added.
On Thursday, the BoE announced it would allow banks to
restart paying dividends and executive bonuses.
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.
However, the central bank warned of downside risks from the
pandemic and new trade restrictions with the EU that take effect
on Jan. 1, and repeated that financial market volatility could
arise even though the broader financial system was stable.
"Market volatility could be reinforced in the event that
some derivative users are not fully ready to trade with EU
counterparties or on EU or EU-recognised trading venues.
Financial institutions should continue taking measures to
minimise disruption," it said.
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)
