Europe's banks could survive a drastic economic downturn, stress test shows

The European Central Bank says the banking sector could withstand a severe economic downturn without depleting their financial buffers against losses

Germany Economy (Copyright 2023 The Associated Press. All rights reserved)

Europe's banking sector could withstand a severe economic downturn without depleting their financial buffers against losses, the European Central Bank said Friday.

A survey of 98 large and medium-sized banks done by the ECB's supervisory arm in conjunction with the European Banking Authority showed that even in the most adverse scenario — a fall of almost 10% in economic outpoint over three years — banks would still have enough capital to cover losses and then some.

The stress test was not a pass-fail exercise for banks in the 20 countries that use the euro currency. Rather, results for individual banks will be used by banking regulators in determining how much capital they need to hold in reserve.

Banks are crucial to the European economy because companies get most of their financing from them, instead of from financial markets — the opposite of the situation in the U.S.

The ECB took over supervision of the biggest banks after the eurozone debt crisis more than a decade ago, when bank losses led to heavy bailout costs for governments. National supervisors were perceived to have been less than vigilant on developing risks.

Scrutiny of bank finances has grown after the failure of three U.S. banks amid rising interest rates that led to losses on investments and mass withdrawal of deposits. The financial turmoil then hit Credit Suisse, a globally significant bank that had long-running problems, leading the Swiss government to engineer an emergency takeover by rival UBS to prevent further banking chaos.

Switzerland is not part of the European Union, where some of the safeguards instituted after the 2008-2009 global financial crisis were more widely applied.