Britain's four biggest banks will be among 124 across the European Union being subjected to stress tests later this year in an attempt to end lingering doubts about the strength of the banking system five years on from the financial crisis.
Barclays, HSBC and bailed-out Royal Bank of Scotland and Lloyds Banking Group are named alongside other major banks such as Deutsche Bank and Santander which will be forced to test their ability to withstand shocks to in the financial markets.
The precise terms of the shocks are yet to be announced but the European Banking Authority said they would involve credit risk, market risk, sovereign risk, securitisation and cost of funding.
The results will be announced in October and to pass the tests – the third imposed across Europe since the banking crisis – banks will need their main measure of capital to be above 8%, and 5.5% in the most stressed scenarios, which will cover three years to 2016.
Announcing the details, the EBA said local regulators "may set higher hurdle rates and formally commit to take specific actions on the basis of those higher requirements".
The pan-European regulator provided no details about what actions it would expect after October from banks which had failed the tests and how long they might be given to plug any shortfalls.
"The objective of the EU-wide stress tests is to assess the resilience of financial institutions in the EU to adverse market developments and assess the potential for systemic risk to increase in situations of stress. The evaluation is based on consistency and comparability of the outcomes across banks," the EBA said.
The stress tests had faced criticism in the past for being too lenient – Ireland's banks were given a clean bill of health not long before they were bailed out – and this year the tests for 2014 have increased the threshold from 5%. The banks are also being required to conduct an asset quality review in parallel to the stress tests which will measure the values assigned to their loans and is intended to add extra credibility to the exercise.
The bank's figures for the year-end 2013 will be subjected to the three-year test and will assume no growth by the bank during the period.
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