(Reuters) – European Union banks (EU) are solid enough to cope with an economic shock caused by geopolitical and commercial tensions, the European Banking Authority (ABE) said on Friday by presenting the results of its last resistance test in the sector.

The ABE tested the way in which 64 European banks would react to a prolonged recession in the EU and other advanced economies, concluding that none would go below the minimum equity requirement, and that one would not meet its lever requirement.

“The results indicate that the EU’s banking system could resist a severe but plausible macroeconomic scenario, reflecting resilience acquired by banks in recent years,” said the ABE, calling on establishments to maintain an adequate capital level.

European and American banking authorities have set up formal and complete resistance tests after the 2008 global financial crisis, which had led to costly banking public rescues.

Certain elements of the unfavorable scenario of this year began to materialize, said the ABE, by evoking the American customs duties and the growing tensions in the Middle East.

The banks of the euro zone representing three -quarters of the total assets of the EU participated in the exercise, which simulates the losses they could undergo by analyzing their performance over a period of three years according to a reference scenario and an unfavorable scenario.

In the unfavorable scenario, the worsening of geopolitical tensions and protectionist trade policies leads to an increase in energy and raw material prices, disrupts supply chains and weighs on consumption as well as investment, causing a cumulative contraction of 6.3% of the Gross Domestic Product (GDP) in the period 2025-2027.

This would result in cumulative losses of 547 billion euros for the banks tested, said the ABE, an amount greater than 496 billion euros envisaged during its 2023 resistance test.

If the impact on capital reserves is particularly severe for certain European subsidiaries of large American banks, all establishments have been able to comply with the fundamental funding requirements, the ABE said. A single establishment would not meet the requirement relating to the lever ratio.

In terms of capital reserves, calculated according to the current “transitional” regime which will not apply fully until 2033, the unfavorable scenario would reduce 3.7 percentage points of the basic equity ratio of the tested banks, bringing it from 15.8% in 2023 to 12.1% in 2027.

(Written by Valentina ZA with the contribution of Balazs Koranyi in Frankfurt and Stefania Spezzati in London, Elena Smirnova, edited by Blandine Hénault)

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