By Huw Jones and William Schomberg
LONDON (Reuters) - The Bank of England said it will offer more euros to banks in Britain to avoid any cash crunch after Brexit and warned that other European Union countries are not fully ready for the possible no-deal hit to the financial system.
The BoE said most financial stability risks in Britain from a no-deal Brexit had been mitigated, and UK banks had enough liquidity to go for months without needing to tap markets.
But as a precaution it will launch a new weekly auction of euros from next week to ensure that banks based in Britain can borrow in Europe's single currency, following on from a similar announcement last week about weekly sterling operations.
The European Central Bank confirmed that the Eurosystem of central banks would stand ready to lend pound sterling to euro area banks, if needed.
EU banks hold 15 percent of UK bank debt and 10 percent of UK government bonds.
With Brexit due to happen on March 29, British Prime Minister Theresa May is holding out for further concessions from Brussels, keeping the possibility of a disruptive, no-deal Brexit on the table.
But she has also opened up the possibility of a delay to Britain's exit from the EU.
The BoE and ECB are activating currency swap lines set up following the financial crisis a decade ago.
RISK FOR EU BORROWERS
The BoE said that while Britain's banks and financial system were ready for the "significant" volatility that would be unleashed by a no-deal Brexit, households and companies in the rest of Europe might face disruption.
Other EU countries have not been as active as Britain to ensure that its borrowers could access financial institutions across the English Channel.
Potential problems for borrowers in the EU included higher interest rates on loans, and customers in the bloc were not ready to do business with newly created units of banks and exchanges headquartered in Britain which have been set up in cities such as Frankfurt and Amsterdam in response to Brexit.
Only 10-20 percent of major clients in the EU have completed the paperwork needed to switch locations.
There was a risk that problems in Europe could have a knock-on effect in Britain, the BoE's Financial Policy Committee said in a statement published on Tuesday.
"Some disruption to cross-border services is possible and, in the absence of other actions by EU authorities, some potential risks to financial stability remain," it said.
The British central bank also said EU banks and insurers might have less appetite for UK government bonds and bank debt if Britain leaves the bloc without a deal, due to tougher capital rules by EU regulators.
BoE Governor Mark Carney has previously warned that Britain was reliant on the "kindness of strangers" because of its large current account deficit which could become harder to fund if the country suddenly lost the confidence of foreign investors.