Europe stress test risks being mired in wrangling

* No quick joint stress test seen in Europe

* Political wrangling seen standing in way

* Europe has no joint regulator

* Tests have little value if not stringent

LONDON/BRUSSELS, May 6 - Europe risks being mired in political wrangling if it decides to set up a joint stress test for its banks and could fail to give markets a lasting leg-up if politicians watered down the methods.

Finnish Finance Minister Jyrki Katainen on Tuesday called for joint stress tests in Europe and shares rallied as markets took a bet that results of U.S. tests later this week would reassure investors unsettled by months of uncertainty.

But analysts doubted Europe would come up with a unified answer soon. And even if it did, the success of any stress test would depend on how stringent it was and whether there was quick action to any problems uncovered.

"A stress test is only as good as the criteria," said Dirk Hoffmann-Becking, an analyst at Bernstein Research.

"If one of the main issues for the U.S. stress test is the question of how much money (Treasury Secretary Timothy) Geithner can get out of Congress ... then that should affect the credibility," he said.

So far, regulators in Europe have reacted at different speeds as the crisis has unfolded, and there has been a massive difference in how willing governments have been to step in with bailouts bankrolled by taxpayers.

A pan-European stress test, which would largely focus on the 40 to 45 banks with cross-border operations, would raise the thorny and unresolved issue of burden-sharing, or which countries would bail out or help a bank in trouble.

Britain's Financial Services Authority, which oversees the EU's biggest banking centre, has said there is no "European taxpayer" at present and that national supervisors are accountable to national taxpayers.

LUKEWARM

About 10 of the 19 U.S. banks being tested will be directed to aim for a higher capital ratio better able to absorb losses, a person familiar with official talks told Reuters. Official results of the tests are due out on Thursday.

"Surely by now, market participants have learnt to differentiate between the stronger and weaker institutions, and if not, that is a pretty pitiful state," Goldman Sachs Chief Economist Jim O'Neill said in a note.

The UK is unlikely to repeat the cumbersome exercise after it already subjected its banks -- battered by heavy mortgage exposure -- to tests many observers say are more stringent than the ones now applied in America.

The tests assumed house prices, commercial real estate and unemployment levels could be more severe than in the recession of the early 1980s and may last for several years, according to people familiar with the matter.

Britain required Royal Bank of Scotland and Lloyds Banking Group to take state funds to rebuild capital and take government-backed "catastrophe" insurance on over $800 billion of assets. Other banks, including Barclays and HSBC, raised capital privately.

Germany also sounded a lukewarm note about the issue after a monthly round of talks in Brussels.

"What we have to watch out for is that these stress tests don't end up intensifying the crisis because of how their results are revealed to the public," Finance Minister Peer Steinbrueck said on Tuesday.

The country is expected to set up a "bad bank" to house toxic assets, particularly from the state-backed Landesbanken, but has said any such solution should be linked to a restructuring of the ailing regional lenders.

Other countries have applied stress tests, but criteria and outcomes remain unclear. Governments may hesitate before running full-blown checks, knowing the outcome might well trigger heavy pay-outs of taxpayer money.

Switzerland, for instance, faces total balance sheet liabilities from its two biggest banks -- Credit Suisse and UBS -- roughly six times as high as the country's Gross Domestic Product.

The Swiss government has already stepped in to help UBS after the wealth manager racked up more structured credit losses than any of its European rivals.

While the likelihood of a joint stress test in Europe is small, there has been some limited progress in how the blocks' myriad regulators are working together.

The Committee of European Banking Supervisors (CEBS) is already stepping up coordination among the EU's 27 national banking regulators to forge a more common approach to how they stress test banks nationally.

"At this point we are not involved in a pan-European stress test," CEBS secretary general, Arnoud Vossen, told the Reuters Financial Regulation Summit last month.

"At the end of the day when something goes sour, the one responsible for addressing the issue is the national supervisor. We are going to a more European approach in this area but we are not there yet," Vossen said.