European Banks Ace U.S. Fed's Stress Test, Show Strong Capital Levels

The U.S. units of major European lenders including Deutsche Bank, Barclays and Credit Suisse sailed through the Federal Reserve's annual "stress tests" on Thursday, showing they hold enough capital to weather an economic shock.

For the seven European bank subsidiaries the Fed oversees with more than $100 billion in assets, the average capital ratio -- a measure of the cushion a bank has to withstand potential losses -- remained well above the regulatory minimum of 4.5%.

It was also higher than the average ratio for the broader group of 34 banks tested, according to a Reuters analysis of the results.

The average capital ratio for the seven European lenders stood at 15.2%, compared with 9.7% for the 34 banks.

Deutsche Bank's U.S. operations had the highest ratio of all banks at 22.8%, while Credit Suisse was the third-highest of the group with a ratio of 20.1%. HSBC was the straggler of the foreign pack with a ratio of 7.7%.

However, Credit Suisse's core capital ratio suffered the biggest fall of all the banks tested under the severe stress scenario, eroding by more than 7 percentage points from its starting point. HSBC's buffer fell the second most, dropping more than 6 percentage points.

Under its annual stress test exercise established following the 2007-2009 financial crisis, the Fed assesses how banks' balance sheets would fare against a hypothetical severe economic downturn. The results dictate how much capital banks need to be healthy and how much they can return to shareholders.

This year's severely adverse scenario saw the economy contract 3.5%, driven in part by a slump in commercial real estate asset values, and the jobless rate jumping to 10%.

The other four European subsidiaries tested were UBS America Holdings, Santander Holdings USA, and BNP Paribas USA.

While the scenarios were devised before Russia's invasion of Ukraine and a sharp jump in inflation, the tests should reassure policymakers that Europe's top lenders are resilient enough to withstand a possible recession this year or in early 2023.

The Bank of England said this month it was satisfied lenders were no longer "too big to fail," although it did call for greater clarity on how much liquidity three major banks including HSBC would require if they needed to be wound down in a future crisis.

The European Banking Authority is scheduled to run its next EU-wide stress test in 2023 but investors are on high-alert for evidence of a fall in asset quality at European banks, as borrowing rates begin to rise from historic lows.

In 2020 the Fed changed how the test works, scrapping its "pass-fail" model and introducing a more nuanced capital regime.