By Steve Slater and Huw Jones
LONDON (Reuters) - A health check of European banks is expected to show on Friday that around 10 lenders need more capital to withstand a prolonged recession, as criticism grew that Europe has been too slow to repair the industry.
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The International Monetary Fund warned Europe it is taking too long to rebuild its banking system, and the threat that the Greek debt crisis could spread to bigger countries such as Spain and Italy has rattled investors and dragged bank shares to a two-year low.
Europe's so-called "stress test" will make 90 lenders reveal for the first time their profit forecasts, a breakdown of their sovereign bond holdings and funding costs, and will force the weakest to recapitalize.
Austria's Volksbanken <OTVVp.VI>, which local daily Wirtschaftsblatt said earlier in the day had failed the test, late on Thursday sold its eastern European arm VBI to Russia's Sberbank <SBER03.MM>, and Greece's EFG Eurobank <EFGr.AT> said it was in talks to sell a majority stake in its Turkish unit Eurobank Tekfen.
Volksbanken did not say how much it would raise from the sale, but banking sources have said it could be around 590 million euros ($835 million). It helps Volksbanken show it can shore up its balance sheet, while Greek banks are under pressure to strengthen their capital to cope with the economic crisis at home.
The IMF said recapitalization of Europe's banks had been slow and lagged the repair work done in the United States since the financial crisis.
Fears the crisis will spread to Spain and Italy have caused a jump in borrowing costs for the countries and banks within them and prompted concern banks are not resilient enough to cope with potential losses if the crisis deepens.
The European Banking Authority (EBA) will announce the results of the industry health test at 1600 GMT.
A poll last month by Goldman Sachs of 113 investors, including long-only investors and hedge funds, expected nine banks to fail the 5 percent core capital pass mark in the face of a theoretical slide in stock, bond and property prices during a two-year recession.
Most expectations now are for five to 15 banks to fail, but no large bank is expected to fall short, and the total additional capital needed could be less than 10 billion euros.
Banks that fail must produce firm plans by September on how they will plug capital shortfalls by the end of this year, with their home state ready to step in with taxpayers' money if need be.
Lenders that scrape through the test will also be expected to shore up their capital buffers.
"It is action rather than analysis that is important. The regulators and the banks already know who the weaker players are. The stress tests can confirm that, but they will have no teeth unless followed up by restructuring and consolidation of the financial landscape," said Nils Melngailis, managing director at restructuring advisor Alvarez & Marsal.
This is the third, toughest and most comprehensive test of lenders in the European Union since the global financial crisis, which began four years ago.
Investors and analysts will be given 3,000 data points on each bank, ranging from profit forecasts to quality of capital buffers, compared with just 100 pieces of information last year.
Banks have already warned that investors will be unnerved by so much data on sovereign debt holdings at a time when bonds of countries like Ireland and Greece are in junk ratings territory.
The EBA says more transparency is better, allowing analysts to run their own tests so they feel they have a complete snapshot of problem areas and to remove some of the uncertainty that sent banking shares to two-year lows this week.
But there have been problems as the release date neared.
Germany's Helaba ruled itself out of the stress test after complaining that the regulator's capital rules were too strict, and two Spanish banks that will fail also blamed the regulator for being too strict on the use of capital that can be included.
Euro zone sources told Reuters two weeks ago that 10 to 15 banks are likely to fail the test, with casualties expected in Spain, Greece, Germany and Portugal.
($1 = 0.706 Euros)
(Reporting by Huw Jones and Steve Slater; Editing by Will Waterman)