LONDON, Dec 11 (Reuters) - European Union banks may be losing appetite for exposures to Britain, the EU’s banking watchdog said on Friday, as the prospect of a no-deal Brexit that could disrupt financial markets increased. Britain ceases to have full access to the EU after Dec. 31 and many banks in London have opened hubs in the bloc to avoid being cut off from EU clients. The European Banking Authority (EBA) said these hubs should ensure that adequate management capabilities are in place in the EU. Lenders should also ensure that their EU customers’ exposures to Britain have been transferred to the bloc, EBA said. The relative increase in UK exposures in the year to June was much less than the overall increase in total volume of loans at EU banks, which may reflect “diminishing interest” in business with an exposure to Britain, EBA said. The watchdog was publishing a risk assessment of the European banking system, examining 129 EU banks, and a further six from Britain, setting out 7,600 data points per lender, including details on COVID-19-related loans. Banks are generally resilient, holding 318 billion euros in capital above overall requirements, with a 15% average core solvency ratio to risk-weighted assets in June, up 60 basis points year-on-year. But Stage 2 loans, where the risk of default has increased significantly, rose 23% to 1.2 trillion euros in June compared with the same month in 2019 as the impact of COVID-19 on businesses and households was felt. “It still needs to be seen how the phasing out of COVID-19 related measures ... will affect asset quality, but it is very likely it will deteriorate further,” EBA said. Government-backed guarantees on loans and repayment holidays on mortgages were temporary, and banks should engage as soon as possible with struggling borrowers, EBA said. The hit from rising provisioning for loans has yet to affect capital ratios at a time when rising impairment costs have further depressed low profitability, EBA said. “Prudent capital distribution policies are still required,” EBA said.