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UPDATE 2-EU delays banks stress test, eases capital rules on coronavirus

Huw Jones and Francesco Canepa

(Adds reaction, ECB measures)

LONDON/FRANKFURT, March 12 (Reuters) - European Union banking regulators have delayed this year's stress test and eased some capital rules to avoid banks turning off the taps to an economy reeling from the coronavirus epidemic.

The virus has already forced banks to operate from split sites or ask staff to work from home, forcing regulators across the world to look at ways to temporarily ease red tape.

"Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties," said Andrea Enria, chair of the European Central Bank's supervisory arm, which temporarily dropped some capital requirements for lenders struggling with the effects of the virus.

The European Banking Authority (EBA), which coordinates banking rules, said it has postponed its stress test this year for top lenders from across the EU.

"For 2020, the EBA will carry out an additional EU-wide transparency exercise in order to provide updated information on banks' exposures and asset quality to market participants," the Paris-based watchdog said in a statement.

The stress test involves banks collecting thousands of data points that are cross-checked. The EBA had been due to publish the results in July.

"It is logical that banks are being asked to focus on the very real stress facing the economy rather than diverting resources to a fictional exercise," said Rob Smith, a banking partner at consultants KPMG.

The Bank of England had no immediate comment on whether it would delay or scrap its own test of top UK lenders this year. Major UK banks were also taking part in this year's EU test because of the transition period that followed Brexit in January.

RAINY DAY BUFFER

The EBA said non-essential visits by supervisors to banks could also be postponed and deadlines for reporting some data to regulators could be put back, recommendations the ECB said it will discuss with banks.

The EBA said that some capital buffers have been designed for use during a downturn to ensure continued lending to the economy.

In response, the ECB said it will allow banks to operate temporarily below the level of capital defined by its guidance for so-called Pillar 2, a reference to a bank's additional amount of capital above the core mandatory minimum.

Banks could also ease back on the amount of liquidity they hold, a reference to cash and easily sellable debt to cover short term day-to-day funding. Many lenders are holding well above the minimum level.

The ECB said these measures would be enhanced by national regulators relaxing their counter cyclical capital buffers that are built up in good times for release in downturns or market shocks.

ECB policymakers also approved fresh stimulus measures on Thursday to help the euro zone cope with the "major shock" of coronavirus in an unprecedented synchronized move by its independent monetary and supervisory arms.

The Bank of England told UK lenders on Wednesday it was effectively scrapping this buffer until at least March 2022, giving banks more headroom to back loans of up to 190 billion pounds.

Denmark said on Thursday it would release this buffer for banks to raise an additional 200 billion Danish crowns for lending. Sweden is also considering a cut to the buffer. U.S. Treasury Secretary Steven Mnuchin said on Wednesday that U.S. regulators are looking at possible short-term actions.

The EBA stressed that lenders should still be "prudent" when paying dividends to investors and bonuses to staff. Flexibility does not mean ignoring the basics of keeping banks sound or taking no action on souring loans.

"Banks should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management," the ECB added. (Reporting by Huw Jones Editing by Rachel Armstrong, Carmel Crimmins and Catherine Evans)