UPDATE 4-Bank of England asks banks how ready they are for sub-zero rates

* BoE writes to banks as part of negative rates assessment

* Letter focuses on technology preparedness

* BoE asks for responses by Nov. 12

* Central bank's next move expected to be more bond-buying

* Bailey: not near debating whether to use negative rates

* Investors see sub-zero rates in May next year
(Adds comments from Bailey)

By Huw Jones and William Schomberg

LONDON, Oct 12 (Reuters) - The Bank of England asked banks
on Monday how ready they are for zero or negative interest
rates, following up its announcement last month that it was
considering how to take rates below zero if necessary.

Other central banks have pushed rates into negative
territory in an attempt to spur banks to lend more, and the BoE
said in September it was looking into what such a policy might
mean in Britain.

"As part of this work, we are requesting specific
information about your firm’s current readiness to deal with a
zero Bank Rate, a negative Bank Rate, or a tiered system of
reserves remuneration – and the steps that you would need to
take to prepare for the implementation of these," Deputy BoE
Governor Sam Woods said in a letter to banks.

The BoE and lenders had to understand the implications of
any such moves "since the MPC may see fit to choose various
options based on the situation at the time," he said, referring
to the central bank's Monetary Policy Committee.

Woods said he wanted to know if there were any technology
challenges to implementing zero or negative rates.

"We are also seeking to understand whether there may be
potential for short-term solutions or workarounds, as well as
permanent systems changes," he said.

The BoE set a deadline of Nov. 12 - a week after its next
monetary policy announcement - for banks to respond.

Most euro zone banks have held off passing negative rates on
to the bulk of their retail customers despite borrowing costs
being below zero for the majority of this decade.

However, UK banks would likely face a sharper hit to
profitability if they opted not to shift rates in line with the
Bank of England due to their differing business models.

Banks in most euro zone countries charge customers a fee for
having accounts, whereas in Britain such charges are rare, and
lenders' returns are largely based on the difference between
lending and deposit rates.

Money markets last week pushed back bets that the BoE would
cut rates below zero. Investors see rates falling below zero in
May 2021, instead of March.

The BoE cut its benchmark rate to record low of 0.1% in
March to help the economy through the coronavirus crisis.

Its next move is widely expected to be an increase in its
745 billion-pound ($972 billion) bond-buying programme in
November.

Sterling and British government bonds were little changed in
early trade on Monday.

Governor Andrew Bailey repeated his comments that the BoE's
assessment of negative rates was not a sign that it would cut
rates below zero.

"We have to ask the question, if they're in the toolbox, can
we use them? But we are not near, and we haven't addressed the
question (of) should we use them," he said in a
question-and-answer session with members of the public.

Banks earn money from interest and negative rates would hit
profitability, but Wood's letter made no specific mention of
this, focusing instead on the technical preparedness of lenders.

An accompanying questionnaire asked banks how their retail
and wholesale business's IT systems could cope, and how much
time and money it would cost to make short-term "tactical" and
permanent "strategic" changes.

Banks are already under pressure to help households and
businesses struggling with the pandemic. They also could face a
reduction in access to markets in the European Union when
Britain's post-Brexit transition period expires.

($1 = 0.7665 pounds)
(Reporting by Huw Jones, writing by William Schomberg,
additional reporting by Iain Withers, editing by Larry King and
Toby Chopra)