UPDATE 1-EU to stress test banking system by Sept-EU sources

BRUSSELS, May 12 - The European Union will stress test its banking system by September to determine its resilience to the economic downturn and find out if it is adequately capitalised, EU sources said on Tuesday.

The stress tests will be done by national supervisors according to common guidelines and methodology of the Committee of European Banking Supervisors (CEBS), the sources said.

"The decision was taken by the EU finance ministers. They decided to ask the Committee of European Banking Supervisors to organise a stress test," one source familiar with the ministers' deliberations said.

"But it is not a stress test of individual institutions like the Americans are doing. It is more a highly aggregated stress test, which should show the degree of resilience of the overall EU banking sector," the source said.

"It would show if there are additional capital requirements or if banks are adequately capitalised for the present situation," the source said.

The United States has tested 19 individual banks to see if their capital was sufficient to withstand any further deterioration of the economic situation and found that 10 of them should boost their capital by an aggregated $74.6 billion.

A second EU source stressed the pan-EU test would not single out individual institutions, as this was the role of national authorities.

"The U.S. style does not make sense for the EU as a whole -- national supervisors do that. The U.S. has made their stress tests very high profile because they wanted to force their banks to recapitalise, but in Europe stress tests existed, exist and will continue to exist," the second source said.

The source said bank recapitalisation had already taken place in Europe.

The result of the stress test of the EU banking system is to be ready by September, when the EU's Economic and Financial Committee (EFC) of junior finance ministers and central bankers meets on the stability of the financial sector.

"The EFC has discussed the U.S. exercise. In September, the EFC has what is called the financial stability table, they do that twice a year, it is a huge exercise, a review of the financial services sector, that's why...September," the source said.

There are no plans to make the results of the system stress test public at this stage, sources said.

The test would provide the EU with its own data on the strength of its banking sector after the International Monetary Fund said on April 24 that while U.S. financial institutions were about half way through their needed write-downs, their euro area counterparts were still lagging.

In its Global Financial Stability Report, the IMF estimated that banks around the globe will need to write down about $2.8 trillion in loans and securities. So far, about one-third of that amount has been written down.

According to the fund, U.S. banks have written down about $510 billion in assets, putting them about halfway through the process of loan loss recognition. A further $550 billion in write-downs are expected over the next two years.

In the euro area, write-downs so far have totalled $154 billion, with another $750 billion expected through 2010. In Britain, bank credit losses have been $110 billion, with another $200 billion likely in 2009-10, the IMF said.

But the European Central Bank and France voiced scepticism over the estimates saying there were methodological issues that needed clarification.

"With regards to Europe, because of the methodology, in our view we do not have an entirely convincing analysis," ECB President Jean-Claude Trichet has said.