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* Many non-euro zone states to align bank tests with ECB
* Tests need to carry same weight as euro zone's
* Hungary expresses doubts, to use own criteria
* Investors more concerned by economies than regulation
By Laura Noonan
LONDON, Nov 12 (Reuters) - EU nations that lie outside the euro zone plan largely to fall in behind the European Central Bank when they check the health of their banks, helping them to avoid a "two tier" outcome in stress tests next year.
Many supervisors in this diverse group of 11 countries told Reuters they will align their reviews closely with the ECB's assessment of major banks within the currency bloc, a tactic that analysts say should dispel any suspicions that their national tests lack rigour.
In the coming year, the European Union will stage a series of exercises to test the ability of its lenders to withstand a future crisis without resorting to taxpayer-funded bailouts, including in the non-euro zone corners that stretch from Britain to Bulgaria.
These are billed as the most rigorous assessments the banks have ever had, designed to remove doubts about their health after botched EU stress tests in 2010 and 2011 which failed to reveal major problems at some lenders.
The ECB will conduct "asset quality reviews" (AQRs) of the euro zone's 128 largest lenders before it takes over supervising them from national authorities. The AQR will become those banks' starting point in stress tests which the European Banking Authority (EBA) will coordinate in all 28 EU countries, subjecting them to scenarios such as a stock market crash or abrupt change in interest rates.
These exercises risk claiming some non-euro zone banks as collateral damage if there is any perception among investors that results verified by the ECB carry more weight that those produced by supervisors in countries outside the euro zone.
But this prospect now looks remote in many of the 11 countries which are mostly in central and eastern Europe but also include Sweden and Denmark, as well as Britain.
A number of authorities said they are taking steps to mimic major parts of the ECB's exercise, and several said they might hire external consultants to validate their data.
"We would be eager to take part in the EU-wide asset quality review, as the co-ordinated effort would ensure comparability of results," a spokesman for Poland's Financial Supervisory Authority said. "Otherwise, there will be a needless split of the EU banking sector into two parts."
A number of banks may need to raise more capital to fill gaps revealed by the tests, and investors would probably shy away from a lender if they feared the exercise had failed to reveal all problems on their balance sheets.
However, investors and banks analysts told Reuters any differences in the assessments are unlikely to be significant enough to dent investment in banks outside the euro zone - where about a quarter of the EU's 43.5 trillion euros of banking assets are held in standalone banks and domestic groups that largely come under the local regulators.
The AQR is the ECB's first throw of the dice since it was tasked with leading the single supervisory mechanism under a broader European banking union that also aims to harmonise how failing EU banks deal with creditors and are wound up.
The main object is to avoid a repeat of the banking crisis that began in 2008, led to taxpayer-funded bailouts of 275 billion euros across the euro zone alone, and was characterised by disparate responses in different EU member states.
Supervisors in the non-euro zone countries must perform national AQRs, which will include assessments of whether banks have properly valued assets on their balance sheets - unlike during the crisis when highly rated assets such as sub prime mortgage bonds turned out to be worthless.
Banking systems in the 11 countries are as diverse as their geographies. Non-performing loans, where borrowers are in significant arrears on their repayments, range from 17 percent of the total in Hungary - the second highest in the EU - to 0.9 percent in Sweden - the joint lowest.
Supervisors in Lithuania, Poland, Sweden, Denmark, Croatia and Latvia - which is due to adopt the euro on Jan. 1 - told Reuters their AQRs would use the same definitions as the ECB for non-performing loans and forbearance, when banks give borrowers more time to catch up on overdue repayments.
KBW bank analyst Ronny Rehn described this as "one the first milestones" for how non-euro zone regulators would conform with the ECB review.
Britain has yet to say publicly whether it will use the EBA definitions for its tests, a spokeswoman for the Bank of England told Reuters. But Britain, which had to bail out some of its biggest banks during the crisis, has already conducted stress tests on major lenders and is generally at least as rigorous as euro zone authorities in assessing its banks.
A source familiar with the international discussions on harmonising definitions of non-performing loans and forbearance said he expected Britain would adopt them. "I don't see any reason why they wouldn't," he said. "They weren't exactly exercised about it over the course of the negotiations."
Supervisory authorities in Romania, Bulgaria and the Czech Republic declined to comment or failed to respond to Reuters requests for comment on their approach.
KBW's Rehn said national decisions on whether to adopt EBA definitions would be a first point of judgment. "If a country says 'I'm not happy using this definition' there might be some suspicion that their tests might not be as rigorous," he said.
However, he noted the Czech Republic conducted stress tests every quarter with "fairly harsh assumptions". Most Czech banks were owned by parents based in the euro zone which will have to comply with the EBA definitions at group level, he said.
"Czech regulators will likely have to play ball. I think this applies to all central and eastern European countries really - Romania, Bulgaria and even Hungary in my view."
Pockets of discontent remain and some lenders may not be ready to provide all the information that supervisors require.
In Hungary, the central bank said its banks would not be able to "meet the entire range" of the data needed for the stress tests, and would not use the EBA definitions until they become mandatory at the end of 2014.
One senior EU supervisor, who asked for his nationality not to be disclosed, said he saw no connection between the plans of the ECB and of his own non-euro zone authority.
Even the most reluctant countries may escape punishment from investors for any discrepancies in the stress tests.
"If we want some kind of comparison between euro zone and non-euro zone, we'll simply do that assessment ourselves," said Robin Creswell, managing partner at fixed income manager Payden, which has $85 billion under management.
Others would be more concerned with the differing states of the economies in which the banks operate, said John Ventre, head of multi-manager at Old Mutual Global Investors.
He pointed to the risk of deflation in the euro zone, whereas emerging markets outside the currency union commonly have higher inflation rates.
"Constrained credit growth means that there is a risk that a nascent euro zone recovery stalls quickly," he said, noting that more inflationary economies support balance sheets and encourage lending on profitable terms. "And there is nothing worse for a bank than deflation because it means that debts grow rather than shrink in real terms."
His sentiments were echoed by Reg Watson, an equity analyst at Standard Life Investments. "Depending on which non-euro zone country you are talking about, these countries have very differing growth rates," said Watson. "The decision to invest is more likely to swayed by macro factors than the regulatory environment that they are subject to."
For Elisabeth Rudman, team leader for the European Financial Institutions Group at ratings agency DBRS, marginal extra credibility that will be attached to the ECB countries' results is dwarfed by concerns about the exercise as a whole.
"The political environment (including a decision on how to approach the recapitalisation of banks that are solvent but do not meet the stress test threshold) will inevitably dominate the perception of the stress test," she said.