By Valentina Za and Balazs Koranyi
MILAN (Reuters) -Banks across the European Union are strong enough to weather an economic shock driven by geopolitical and trade tensions, the European Banking Authority said on Friday as it presented the outcome of its latest health check of the sector.
The EBA tested how 64 European banks, including 51 euro zone lenders, would react to a prolonged recession across the EU and other advanced economies, finding none would breach their core capital requirement, and only
one would breach its leverage requirement.
"The results indicate that the EU banking system could withstand a severe but plausible macroeconomic scenario, reflecting the resilience built up by banks in recent years," the EBA said, urging lenders to maintain adequate capital.
European and U.S. banking authorities introduced formal, comprehensive stress tests after the global financial crisis of 2008 led to costly state bailouts of banks.
Some elements of this year's adverse scenario had begun to materialise, the EBA said, pointing to U.S. trade tariffs and escalating tension in the Middle East.
Lenders accounting for three quarters of EU banks' total assets took part in the exercise, which simulates the losses banks would incur by analysing their performance over a three-year period under a baseline and an adverse scenario.
Under the adverse scenario, worsening geopolitical tensions and protectionist trade policies lift energy and commodity prices, disrupt supply chains and hurt consumption and investment, driving a cumulative 6.3% contraction in EU economic output over 2025-2027.
That would translate into combined losses of 547 billion euros for the sampled banks, the EBA said, higher than the 496 billion euros envisaged in its 2023 stress test.
While the hit to capital reserves is particularly severe for some European subsidiaries of major U.S. banks, all the lenders remained able to meet core capital requirements, the EBA said, although one would breach the requirement on the leverage ratio.
For 17 lenders, the adverse scenario would entail limits or adjustments to bonus and dividend payments for at least one of the three years.
In terms of capital reserves - calculated using the current 'transitional' regime that tightens progressively through 2033 - the adverse scenario would knock 3.7 percentage points off the sample's aggregate core capital ratio, pushing it to 12.1% in 2027 from 15.8%.
When looking at individual countries, Irish, Danish, French, German and Belgian banks experienced the biggest capital impact, EBA data showed.
For individual banks, Landesbank Baden-Wuerttemberg and two other German regional banks, as well France's Credit Agricole and La Banque Postale, saw the largest capital depletion effect.
While there is no pass/fail threshold in the EU-wide stress test, its outcome feeds into the risk assessment of lenders carried out by supervisors every year, setting bank-specific capital requirements and guidance known as 'Pillar 2'.
(Reporting by Valentina Za in Milan; Additional reporting by Balazs Koranyi in Frankfurt and Stefania Spezzati in London; Editing by Kirsten Donovan)
