UPDATE 2-Bank of England says banks able to support coronavirus-hit Britain

(Adds more detail)

By Huw Jones

LONDON, Aug 6 (Reuters) - Britain's banks hold enough
capital to keep on lending to the country's companies and also
to absorb billions in losses likely to arise due to the COVID-19
pandemic, the Bank of England said.

Companies could suffer a cash flow deficit of up to 200
billion pounds ($263 billion), and banks could be hit by credit
losses of less than 80 billion pounds, the BoE's Financial
Policy Committee (FPC) said on Thursday.

"It remains the FPC’s judgement that banks have the
capacity, and it is in the collective interest of the banking
system, to continue to support businesses and households through
this period," the FPC said in its Financial Stability Report.

"That said, the banking system cannot be resilient to all
possible outcomes ? there are inevitably very severe economic
outcomes that would challenge banks’ ability to lend."

But there would be costs to banks and the wider economy from
taking "defensive actions" like scaling back on lending.

Separately, the BoE said it expected Britain's economy to
take longer to get back to its pre-COVID-19 pandemic size.

The FPC said a "reverse stress test" of lenders showed that
to deplete their capital ratios by more than 5 percentage
points, banks would need to incur credit impairments of around
120 billion pounds.

It would require the cumulative loss of economic output due
to COVID-19 to be twice as big as the Bank's central economic
projection to incur such losses, the FPC report said.

The FPC has been asked by the finance ministry to review
whether changes are needed to Britain's financial system,
including regulation, to improve the flow of finance to all
parts of Britain.

Britain's government has said it wants to "level up" the
regions where investment and productivity lags that of London.

"The FPC intends to focus on examining possible distortions
to the supply of illiquid long-term and equity-like
investments," the report said.

Although Britain left the European Union in January and
transition arrangements end in December with no new UK-EU trade
deal yet in place, the report said "most risks to UK financial
stability that could arise from disruption to cross-border
financial services have been mitigated".

This was the case "even if the current transition period
ends without the UK and EU agreeing specific arrangements for
financial services," it added.
($1 = 0.7595 pounds)
(Reporting by Huw Jones; Editing by Kevin Liffey and Alexander
Smith)