Europe’s largest banks are overall strong enough to withstand another severe economic shock even after the challenging conditions of the pandemic, results of a stress test show. The results pave the way for many banks to restart distributing dividends.
The European Banking Authority’s stress test measures the ability of banks to maintain strong capital levels and keep lending to businesses and households in a severe recession. EBA said Friday that even under one adverse scenario, the EU banking sector would keep its capital ratios at around 10% in 2023, which is considered a strong result and in line with those from U.S. peers.
Under the adverse scenario, EBA assumed a cumulative drop in gross domestic product over through 2023 of 3.6%. It said the scenario is “very severe, also having in mind the weaker macroeconomic starting point in 2020 as a result of the pandemic.” The capital depletion across the sector would be significant—$314 billion—compared with a starting ratio of 15%.
The European Central Bank, which supervises eurozone’s largest banks, recently lifted restrictions it imposed last year on dividends, but said it would take into account the stress-test results when looking at dividend policies bank by bank.
Banks with the lowest capital ratios under those conditions were Italy’s state-controlled Banca Monte dei Paschi di Siena BMPS SpA, which would see its entire capital wiped out. UniCredit SpA is currently in exclusive talks with the Italian government to take over Monte dei Paschi.