UPDATE 1-Irish banks have enough capital to absorb severe shock - central bank

* Capital would fall to 8% from 18.5% in adverse scenario

* Adverse forecasts include rolling lockdowns through 2021

* Counter cyclical capital buffer to remain at 0% in 2021 (Adds details, quotes)

DUBLIN, Nov 26 (Reuters) - Ireland’s retail banks have sufficient aggregate capital to absorb shocks materially worse than baseline projections that already forecast a no trade deal Brexit, a new assessment by the country’s central bank showed.

The regulator helped banks to support the economy through the COVID-19 pandemic by cutting the amount of capital they must set aside to protect against future risks to zero in April, and said on Wednesday it did not intend to increase this counter cyclical capital buffer (CCyB) in 2021.

The adverse scenario in the new study predicts a prolonged period of COVID-19 disruption through most of 2021 similar to the lockdown implemented earlier this year, a slower-than-expected recovery of the global economy and the potential for banks to amplify the downturn by tightening lending standards.

Ireland’s government intends to end six weeks of strict COVID-19 restrictions next week, reopening non-essential retailers and potentially parts of the hospitality sector

“The response of the banking system itself will shape eventual outcomes. Banks should use the extraordinary policy support being provided to maintain a sustainable supply of credit to businesses and households through the recovery,” Central Bank Governor Gabriel Makhlouf told reporters.

The combined transitional core equity tier 1 (CET1) capital ratio of Ireland’s banks - whose reckless lending pushed the country into an international bailout a decade ago - would fall to 12.6% under the baseline scenario and 8% in the adverse scenario from 18.5% currently, the assessment showed.

The central bank also said on Thursday it did not intend to begin phasing in an extra layer of capital requirement - the so-called systemic risk buffer - during 2021.

It will also leave mortgage-lending limits unchanged for the third straight year in 2021, saying they meant the financial system was better prepared for the COVID-19 shock compared with previous crises.

The central bank warned the ability of many firms to survive would depend on being able to restructure pre-existing and pandemic-related liabilities, noting the share of small and medium-sized firms with cash holdings insufficient to cover three months’ operating expenses had doubled to 16% in the pandemic. (Reporting by Padraic Halpin; Editing by Jon Boyle and Mark Potter)