Europe's banking health check has shown countries and lenders are implementing global capital rules at vastly different speeds, and 36 companies would have failed if new capital rules were fully applied.
The euro zone is lagging behind countries outside the bloc in implementing the Basel III capital rules that are due to come into full force in 2019, potentially adding another challenge for the European Central Bank when it takes over supervision of euro zone lenders next month.
"On a fully loaded basis, many banks have only passed the stress test by very thin margins or could be challenged in meeting the requirements, so they will be expected to do more," said Carola Schuler, managing director for banking at ratings agency Moody's.
Some 25 European banks failed a health check of whether they could withstand a recession, and another 11 would have failed if the full Basel III rules had been applied, according to data from the European Banking Authority released on Sunday.
Europe had gained credibility, said Karen Petrou, co-founder of Federal Financial Analytics in Washington. But a similar exercise by the U.S. Federal Reserve was still tougher, among others because it requires banks to fully load Basel.
"It's still an easier and different one than the Fed stress test in many, many respects," she said. "The Fed's test is very qualitative. You can get all the numbers right and still fail."
The wider capital gap with fully implemented Basel rules could put pressure on more banks to improve the amount and quality of their capital, potentially impacting their profitability, growth plans and dividend payouts.
Banks failed if they had common equity of 5.5 percent or less under a 2014/16 recession scenario. The EBA's "stress test" was based on transitional capital rules, which vary by country, depending on how quickly they are phasing in rules.
But for the first time, so-called 'fully loaded' Basel III ratios - applying all the new global rules - were released across Europe's top 130 banks for analysts and investors to compare their capital strength.