* FSA expects stress tests to be done annually
* Spanish banks stoke test results concerns
* No Basel announcement this week
* UK government, FSA meet banks on Thursday
(Adds Turner on Basel Committee, UK meeting, Spanish banks)
By Huw Jones
LONDON, July 14 (Reuters) - Tests of how the European Union's banks could withstand severe shocks without taxpayer help are adequate and cover sovereign debt exposures, Britain's financial watchdog said on Wednesday.
"I think the European stress tests ... have an adequately stressed approach and it will be applied across Europe," Adair Turner, chairman of the Financial Services Authority told reporters.
How the authorities will respond to any banks that fail the test will be shown when the results are announced, Turner said, adding that it would be clear that "significant stress" had been built into the tests to see how banks would cope, both in terms of systemic shocks and particular country crises. The results are due on July 23 and European Union finance ministers remained divided on Tuesday over what data would be published although they pledged to make them as transparent as possible. [ID:nLDE66C1GF]
Markets worry the tests are not stringent enough, particularly in countries like Spain, and whether governments have funds to recapitalise a bank that fails the test.
Borrowing by Spanish banks from the European Central Bank surged in June with a net 126.3 billion euros ($160.5 billion) borrowed -- representing a quarter of the overall amount lent by the euro zone's central bank. [ID:nLDE66C1RA]
Spanish bank Banesto
The Europe-wide plan is to announce how banks would fare if economic conditions worsened, including a deeper fall in the value of sovereign bonds. The tests will apply, for example, a 23 percent discount on Greek sovereign debt held in banks' trading books, a source told Reuters on Tuesday. [ID:nLDE66C1HT]
But there have been splits in the 27-nation EU over how to model such scenarios and how much to publish once the results are in from questionnaires sent out to banks last week.
Turner has already said that banks in the UK will pass.
"Within the FSA last year we did even more extreme stresses. Part of the reason why we then did not actually publish the detailed results is that when do a really extreme stress there is a danger of misinterpretation of it," Turner said.
He expected authorities to move towards annual across-the-board stress tests, which would be made public, and behind them tests of specific institutions "on a rolling basis ... doing even more extreme tests".
SLOW-BURN BASEL
Investors hope that results from the stress tests in Europe, coupled with details of new tougher global bank capital and liquidity rules will give greater certainty.
The Basel Committee of central bankers and supervisors like the FSA from across the world meet in Switzerland on Wednesday and Thursday to finalise work on a global package of bank capital and liquidity reforms.
"We are working on ending up with a significant package of increased capital and liquidity. We are trying to get global agreement on definitions of capital, commonalities we did not have before, a global standard on liquidity," Turner said.
He dampened hopes that the Basel meeting will make any announcements on what new levels of capital banks will need.
"We will not be announcing that stuff until later in the year. This is an ongoing part of the process," Turner said.
"We need to think we need to think about how much we are increasing capital and liquidity requirements, then we need transition timetables that enable us to go to a more stable system while minimising any effects on the rate of growth in the meantime."
The Group of 20 leading countries, which is due to endorse the new bank rules in November, has already agreed on a phase-in from 2012 that will be longer than originally planned.
Banks and some governments say too-speedy implementation would make it harder for banks to continue lending to aid recovery. Britain's banks will meet the FSA and the government on Thursday and banks are under pressure to meet anticipated lending targets to small businesses to spur faster growth.
The government will also outline how it will scrap the FSA and divide its supervisory duties between the Bank of England, a new consumer protection and markets authority and a new serious crime busting agency.
"We are well aware of the need to phase regulatory reform so that it does not slow the recovery from recession," Turner said. (Additional reporting by Nigel Davies in Madrid, editing by Mike Peacock)