UPDATE 2-British banks can withstand pandemic fallout on economy -BoE

(Adds detail)

By Huw Jones

LONDON, May 7 (Reuters) - A stress test has shown that
Britain's top banks and building societies could keep lending to
an economy that shrinks by almost 30% in the coronavirus
pandemic, the Bank of England said on Thursday.

Separately, the BoE held off from further stimulus measures
but said it was ready to take more action to counter Britain's
biggest economic slump in over 300 years.

The BoE's interim Financial Stability Report (FSR) said its
"desk top" stress test was based on an economic scenario
outlined by the its Monetary Policy Report (MPR).

Under the MPR scenario, Britain's GDP drops by almost 30% in
the second quarter versus the fourth quarter of last year and
recovers as lockdown restrictions are lifted.

Britain has been in lockdown since mid-March and the
government is expected to announce some easing of restrictions
in the coming days.

The stress test showed that banks have the capital buffers
to withstand even greater losses than those that result from the
MPR scenario, the FSR said.

"Overall, in the desktop stress test based on the MPR
scenario, banks incur total credit losses of just over 80
billion pounds ($98.86 billion)."

"Overall, banks have the capacity to assist businesses in
meeting cash-flow deficits by expanding the supply of credit to
the economy."

BoE Deputy Governor Jon Cunliffe said that if banks failed
to provide support, as they did in the financial crisis 10 years
ago, the overall economic outcome would be worse and lead to
greater losses for banks.

"On the basis of the scenario and of the desktop stress
test, the economic impact of banks failing to provide support to
the economy could worsen their own capital positions by around a
full percentage point," Cunliffe said.

The BoE reinforced its encouragement for banks to tap
capital and liquidity buffers that are above mandatory minimum
requirements, in order to keep credit flowing.

So-called Pillar 2A buffers cover particular risks at
individual banks and the BoE said they would now be set at a
nominal amount, instead of a percentage of total risk weighted
assets, to alleviate "unwarranted pressure" on banks.

The BoE set out further ways to ease regulatory burdens so
that banks can fully focus on helping businesses and households.

The BoE's Financial Policy Committee said it was postponing
the launch of a climate change-related stress test of banks from
the second half of this year until at least mid-2021.

The BoE said it has also paused work on its stress test of
insurers, saying it won't publish the results and will postpone
the next test to 2022.

Turbulence and instability in financial markets in March has
brought back into "sharp focus" a number of vulnerabilities in
the non-bank sector, Cunliffe said in a reference to investment
funds, some of which had to be suspended.

"The underlying issues in the non-bank sector will need to
be addressed in due course," Cunliffe said.

($1 = 0.8093 pounds)
(Reporting by Huw Jones; editing by Maiya Keidan and Jason
Neely)