* EU paper: bank stress tests should be done annually * Bank profits expected to come under long term pressure * Making national bank levies compatible a "difficult" task (Adds more quotes, background, bank levy paper) By Huw Jones and John O'Donnell BRUSSELS, Sept 29 (Reuters) - European Union recovery broadened in the second quarter and inflation is moderate but banks should face annual health checks as they face many risks, a paper for the bloc's finance ministers said. Exports sparked the rebound but there are concerns over emerging and sovereign debt markets according to the "key risks" paper which examines the economy since April this year. It will be discussed by EU finance ministers on Thursday and Friday. The recovery conceals high divergences across member states but "inflation rates in the EU are set to remain moderate," the paper obtained by Reuters said. Also "some concerns are related to the risk of overheating in emerging markets". Bank earnings have bounced back but this may not last as they face debt funding pressures and risks from their exposures to large companies and corporate property markets. "In the longer-term the sustainability of banks' earnings is not ensured as the previous increase in profits was mainly caused by the reduced impairment on loans and banks' provisioning," it said. Governments in Britain, Germany, Belgium and elsewhere were forced to use billions of euros of taxpayer money to shore up a banking sector that went into near meltdown after the collapse of U.S. Lehman Brothers bank two years ago. The European Central Bank has been gradually phasing out the emergency support it has given to banks since the financial crisis intensified in 2008, although it has been forced to slow that process by the ongoing euro zone debt crisis. The "present outlook suggests that, for many banks, the conditions for exit from the support measures are not favourable and exits should be carefully assessed."

Source