A leading EU official on Tuesday urged full disclosure on how the region's banks perform in stress tests, but sources said the bloc's finance ministers remained divided on what data should be published.

The 27-nation bloc plans to announce on July 23 how its banks would fare under further adverse conditions, including a deeper fall in value of sovereign bonds, in a bid to boost market confidence damaged by the Greek sovereign debt crisis.

The tests will encompass 91 EU banks, which make up 65 percent of the bloc's banking sector. The list includes most of Europe's large banks that operate in more than one country, but also many German and Spanish regional banks, known as landesbanks and cajas, thought to be among the weakest.

It is fully in the self interest of ... every bank for there to be full disclosure of the results of the stress tests, that is the best way of restoring confidence to the banking sector, Economic and Monetary Affairs Commissioner Olli Rehn said.

Of course, in parallel, member states need to have national financial backstops in place in case there are pockets of vulnerability in the banking sector. However, I am confident that overall the European banking sector will show resilience in these stress tests, Rehn said.

But EU finance ministers, meeting 10 days before the results' publication, were still divided over what data should be released, sources close to the talks said.

Several countries are strongly reluctant to publish certain ratios from the stress tests, one EU source said. Others, on the contrary, want full transparency.

French Economy Minister Christine Lagarde said the final decision on what information would be published could only be taken in a teleconference of EU finance ministers on July 22. Discussions will continue until the last minute, she said.

Sources said France was questioning the need to publish the exposure of banks to sovereign debt and underlined the difficulties of having a harmonized tier one capital ratio which would enable comparisons across the EU.

Britain and Spain, on the other hand, were pushing for full transparency and Germany supported the publication of banks' sovereign debt exposure, sources said.

Doubts about European banks' ability to clean up their balance sheets have limited their ability to raise funding and made them highly dependent on the massive liquidity taps the ECB opened after Lehman Brothers' collapse in 2008.

RECAPITALISATION BACKSTOPS

At their meeting on Tuesday, EU ministers will discuss what back-stop mechanisms they can use to recapitalize banks if necessary, as not all countries have, like Spain, dedicated funds for that purpose.

Officials have said that vulnerable banks should first try to recapitalize themselves by tapping private investors and that public money should be used only as a last resort.

If EU governments exhaust their funds, they can turn to a 60 billion euro ($76 billion) EU loan facility that is guaranteed by the EU budget and meant to back-up countries that can no longer sustainably finance themselves on the market.

Euro zone countries will also be able to tap the European Financial Stability Facility -- the euro zone emergency loan special purpose vehicle -- once it is operational.

Analysts said the efficacy of the tests would depend on how much detail they included, and the risk that results may be thin on in-depth information was weighing on the euro.

Cyprus Finance Minister Charilaos Stavrakis said banks would be tested for a combination of scenarios under which the market value of sovereign bonds falls, there is a large increase in the number of non-performing loans and the economy in the main markets where the banks operate deteriorates.

I am hopeful that on balance European banks will come out well from these tests, but in any case I think that transparency and clarity is very, very important. Whatever the situation, European banks will come out stronger once these stress tests are announced, Stavrakis said.

SCENARIOS

The tests are managed by the London-based Committee of European Banking Supervisors (CEBS), which published last week two basic assumptions on which they are based.

One was that the adverse scenario would assume economic growth 3 percent below official Brussels forecasts, which foresee EU economic growth at 1.0 percent this year and 1.7 percent in 2011.

The shock to government bonds would assume a deterioration of market conditions similar to the situation observed in early May 2010, but no precise figures for the assumption have so far been published.

German banking sources have said a markdown of 16 to 17 percent off the market price would be applied to Greek debt. No markdown would be applied to German sovereign bonds, the sources said, and a 0.7 percent markdown would be applied to French sovereign bonds, one of the sources said.

Government bonds of Portugal, Spain, Italy and Ireland would see more significant markdowns, the sources said.

Bankers involved in the stress tests said questionnaires with detailed economic assumptions were sent out on Monday and had to be returned by July 15 to national regulators, which would review and may revise the banks' own assessments.

We will await the results of the bank stress tests with patience -- the central bank has clear parameters and standards, I do not expect that there will be any turbulence, but rather that it can be shown the European banking system is robust and can also resist future crises, Austrian Finance Minister Josef Proell said before the ministers' meeting.

(Reporting by Ecofin team, writing by Jan Strupczewski, Editing by Ruth Pitchford)

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