UPDATE 2-Bank of England adapts bank stress test for pandemic era

* Ring-fenced units excluded from 2021 test

* Virgin Money UK to participate in test

* Aggregate results published in the summer

* Bank-by-bank results due in fourth quarter
(Adds more detail on test, participants, graphic)

By Huw Jones

LONDON, Jan 20 (Reuters) - The Bank of England's health
check on banks this year will seek to ensure that Britain's big
lenders, including HSBC, and Barclays, can
continue supporting the economy during the pandemic and will
also look at how banks can return to more normal dividend
levels.

Last year, the British central bank cancelled its annual
stress test of banks so they could focus on keeping credit
flowing to an economy hit by its worst downturn in 300 years due
to COVID-19 lockdowns.

The test usually focuses on banks' ability to face big
theoretical shocks, but the focus has changed given that the
economy is facing real stresses from the pandemic, the BoE said.

"At this point stress tests are used to assess whether the
buffers of capital that banks have built up are large enough to
deal with how the prevailing stress could unfold," the BoE said
in a statement.

Banks that will be tested this year also include Lloyds
, NatWest, Standard Chartered, and
Nationwide Building Society. Virgin Money UK will take
part for the first time.

The BoE said this year's test of the leading banks will be
conducted in a "staggered" way, with banks submitting their
initial projections earlier in April on coping with a range of
market shocks without going below bespoke minimum capital
levels.

The stress test scenario includes a second dip in economic
growth in 2021-2025 on top of the one seen last year, with UK
residential property prices crashing by a third and unemployment
surging to just under 12%.

The scenario also includes simultaneous economic slowdowns
globally, with protectionist tendencies in world trade becoming
entrenched, the BoE said.

The test will also check if a big change in consumer
spending patterns seen during the pandemic, such as sharp falls
in spending on travel, entertainment and hotels, poses a risk to
banks if these trends persist long term.

The BoE will publish aggregate results in the summer, with
the usual bank-by-bank outcomes made public in the fourth
quarter.

After the economy went into its first lockdown in March last
year, the BoE told banks to suspend dividend payments to
preserve capital. In December, the central bank set out
"guardrails" for relaxing its curbs on bank dividends.

"As noted in the December 2020 Financial Stability Report,
the results of the 2021 test will also be used as an input into
the Prudential Regulation Authority's transition back to its
standard approach to capital-setting and shareholder
distributions through 2021."

To help banks with the different timetable this year, the
BoE said their "ring fenced" retail banking units would not form
part of the test, but will be included in the 2022 test.

(Reporting by Huw Jones, editing by Louise Heavens and Jane
Merriman)