The London-based European Banking Authority (EBA) scrutinized a total of 48 lenders on the continent between January and October, confronting them with a hypothetical scenario where gross domestic product in the EU would fall by 2.7 percent over the next two years.

On top of that, the tests simulated unemployment rising by 3.3 percent to levels last seen in 2009, during the financial crisis. Moreover, economic risks linked to a no-deal Brexit, falling trade and financial market disruption were built in, as were falling property prices, losses on holdings of sovereign debt and even potential fines over embezzlement by managers.

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The 2018 exercise showed among the worst performers British banks Barclays, Lloyds and Royal Bank of Scotland, along with Italy's Banco BPM and UBI, as well as Germany's regional lender NordLB.

Overall, however, the EBA said the stress-tests showed that Europe's banks were in much better shape as a result of clean-up measures imposed by national regulators and the European Central Bank (ECB) since the 2008 global financial crisis.

"The outcome of the stress test shows that banks' efforts to build up their capital base in the recent years have contributed to strengthening their resilience and capacity to withstand the severe shocks and material capital impacts of the 2018 exercise," Mario Quagliariello, director of economic analysis and statistics at the EBA, said in a statement.

CET1 is key

Among the 48 banks subject to the stress test were 37 from the eurozone, which are directly overseen by the ECB's banking supervision arm and accounting for 70 percent of all bank assets in the euro currency area.

Those included eight German banks, six French lenders BNP Paribas and four each from Italy and the UK. In banking jargon, some of those lenders — Germany's Deutsche Bank, for example, or France's BNP Paribas — are called "systemically important" for the euro area, meaning effectively they are too big to fail.

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British bank Barclays and Italy's Banco BPM suffered the worst end point when put against the "doomsday scenario." Barclay's Common Equity Tier 1 (CET1) ratio – a key measure of a bank's health — fell to 6.6 percent, while Banco BPM's dropped to 6.67 percent.

Capital at the British banks was particularly hit due to their exposure to credit other than secured loans like mortgages. In addition, there was great uncertainty over their future business under a disorderly Brexit scenario. Italian lenders, in turn, were discounted because of their huge holdings of government debt that could prove a burden amid a negative outcome of Rome's budget gamble.

The stress test involved a particularly harsh scenario for German banks as it calcualted a drop in GDP of 3.3 percent between 2018 and 2020. Here, NordLB fared worst with an expected CET1 fall to around 7 percent.

Deutsche Bank, which has seen its shares collapse by almost 50 percent in the past few years, fared better than expected. Even under the toughest scenario, its CET1 wouldn't fall lower than 8.1 percent.

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The European Union legal minimum for CET1 is 4.5 percent of risk-weighted assets, though supervisors generally set higher requirements after the 2008 financial crisis had shown that banks were not properly capitalized to weather a crisis.

While banks can't officially fail the test, supervisors typically use the results to calculate whether or not banks must raise fresh capital to boost its buffers, sell risky assets or scrap dividend payments.

uhe/jd (Reuters, AFP, dpa)