UPDATE 3-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 and banking supervisors 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).

But it won't single out banks that need more capital or be made public, supervisors said, a step critics say would keep investors in the dark to some extent about potential problems.

A U.S. stress test of individual banks made public last week was widely seen as helping to give clarity to investors.

"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 EU 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.

CEBS said it already presented a broad risk assessment of the EU banking sector to the bloc's finance ministries at the end of the first quarter and is in the middle of its second assessment due by September that will also look at the viability of the overall banking system.

"We will link the second assessment with stress tests but we have not planned an EU-wide stress-test that would be aimed at identifying the need for recapitalisation," CEBS Secretary General, Arnoud Vossen, told Reuters.

"The reason is that it's the national responsibility to do stress tests that determine the need for capitalisation," Vossen said. The presented outcome will not be on a bank by bank basis and will be confidential, Vossen said.

RESULT DIFFICULT TO PREDICT

Economists said it was difficult to predict what such a stress test could reveal, because it was not clear what criteria would be applied.

"The U.S. is probably further down the road in declaring losses and in the economic cycle," said Dominic Bryant, economist at BNP Paribas.

"But as far as actual figures are concerned it is guesswork until they give more details on how they are going to conduct the tests."

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.

Credit Suisse economists estimated last week that European banks would need an extra 84 billion euros of capital if they were subjected to a U.S. style stress test.

"The U.S. style does not make sense for the EU as a whole -- national supervisors do that," a second EU source said. "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."

Bank recapitalisation has already taken place in Europe but supervised on a national basis.

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.

"In September, the EFC has what is called the financial stability table, they do that twice a year," the source 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.