By Huw Jones

LONDON Three banks from the European Union failed to meet binding capital requirements in a stress test that saw a theoretical 496 billion euros ($546 billion) wiped from their buffers, the bloc's banking watchdog said on Friday.

Bank stress tests became a feature in Europe and the United States after the 2008 global financial crisis when taxpayers had to bail out some undercapitalised lenders. They are now part of routine supervision to ensure banks can still support the economy even in times of stressed markets.

The European Banking Authority (EBA) said the test covered 70 banks, 20 more than in 2021 with 57 from the euro zone, representing about 75% of banking assets in the EU.

It did not name the three banks that failed to meet the requirements.

In what the watchdog described as its toughest test yet, it examined the impact of a three-year scenario to 2025 of credit, market and operational risk losses on a bank's mandatory core capital buffer. It included economic growth slumping by a cumulative 6%, and big falls in property prices.

Banks began the test against theoretical shocks with an average buffer of 15% of their risk weighted assets, and totted up losses of 496 billion euros during the test, depleting capital buffers by 459 basis points to an average of 10.4% by the end of the test's third year.

This was a smaller reduction than last time round, partly due to better profitability, the impact of regulatory reforms since the global financial crisis, and better quality of assets at the start of the test, the EBA said.

Although there is no pass or fail mark, banking supervisors, use the results to assess if banks need to hold extra capital in addition to their mandatory core buffer, known as total SREP capital requirement or TSCR.

"Under the adverse scenario, all banks except three meet the TSCR," the EBA said.

It said four banks did not meet their mandatory leverage ratio requirement, a broader measure of capital to total assets.

"For three of them the difference is small, while they meet the risk based TSCR," it said.

The watchdog said that in year three of the test 37 banks fell below capital levels that trigger curbs on payouts, known as the maximum distributable amount or MDA.

The EBA said it had also conducted an ad-hoc analysis of banks' holdings of bonds and an assessment of unrealised losses to understand the potential evolution of these losses at a time of rising interest rates.

($1 = 0.9078 euros)

(Reporting by Huw Jones; Editing by Mark Potter)