Stress Test Data May Cause Market Instability, EU Document Says

July 12 (Bloomberg) -- The risks to financial stability of analysts using European Union stress-test data to conduct their own exams on banks “should not be underestimated,” according to a confidential document prepared by EU officials.     There is a “general expectation” that the EuropeanBanking Authority stress test results will be “challenged bymarket tests” aiming to address “the perceived weaknesses inthe design of the test,” according to the draft document prepared by EU officials and obtained by Bloomberg News. The document also says some countries “under market expectations of sovereign default’’ may have difficulties funding bank recapitalizations.     This year’s exams, which will be published on July 15, willinclude a review of how lenders would handle a 0.5 percenteconomic contraction in the euro area in 2011, a 15 percent dropin European equity markets as well as possible trading losses onsovereign debt. The banks will be expected to maintain a CoreTier 1 capital ratio of at least 5 percent under the stress-test scenarios, the EBA has said.     European regulators are seeking to assuage investor concern that banks in the region are inadequately capitalized with a second round of stress tests. The EBA toughened this year’stests by tightening its definition of bank capital and forcing firms to disclose more about their holdings of government bonds.     Some of the risks highlighted in the document will bediscussed at an EU press conference later today, according to aperson familiar with the situation. A spokeswoman for the European Banking Authority, which is conducting the tests,declined to comment.