By Huw Jones

LONDON (Reuters) - The world's financial system coped well with market volatility following Britain's vote last month to leave the European Union, the global Financial Stability Board said on Thursday.

The FSB is chaired by Bank of England Governor Mark Carney and coordinates financial regulation for the Group of 20 economies.

At a meeting in China, the board looked at market volatility following the United Kingdom's vote to leave the European Union, which sent sterling to its weakest level in three decades.

"During this period, the global financial system has continued to function effectively," the FSB said in a statement.

"Authorities are monitoring market developments and stand ready to address any financial stability issues, should they arise," it said.

Some banks see market liquidity as stretched, making it harder for the financial system to absorb shocks.

Banks have blamed tougher regulation for making it more expensive for them to offer liquidity in markets at all times but the FSB said it remains sceptical about this argument.

"On balance the evidence to date is that the reforms have reduced the likelihood that a deterioration in market liquidity could result in wider financial stability problems," it said.

It still saw risks from defaulting or non-performing loans and incomplete bank balance sheet repair which should be addressed - comments that will be widely seen as referring to lenders in the euro zone.

The European Central Bank will examine on Thursday a plan by Monte dei Paschi BMPS.MI to sell bad loans, three sources close to the matter said, as Italy's third-largest bank works to comply with a regulatory request to strengthen its balance sheet.

The impact of non-performing loans will be raised again when the results of this year's EU stress test of top banks are revealed on July 29.

The FSB meeting in Chengdu will update G20 finance ministers on progress in making the financial system safer since the 2007-09 crisis.

The board said global regulators will publish a report by year end that will set out a "toolkit" for cracking down on misconduct at banks.

It also looked at other steps regulators could take regarding banker pay and governance of firms to cut misconduct risk.

The FSB has also been looking at how auditors could better spot warning signs of excessive risk taking at the world's biggest banks. It backed a target of cutting by a quarter the number of audits that raise "quality issues".

The board also agreed to allow a representative of the European Central Bank's banking supervisory unit to attend full FSB meetings, a sign of the ECB's growing clout in global rulemaking.

(Reporting by Huw Jones; editing by Jason Neely/Ruth Pitchford)