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.
Banks' common equity - as a percentage of risk-weighted assets - were on average almost 100 basis points lower on a full Basel III basis than the reported ratios under the 2014/16 recession scenario of the test, according to Reuters calculations.
The divergence was substantial across countries.
Capital ratios for Greek banks were on average 7.8 percentage points lower under full Basel rules, and the difference for Irish banks was almost 7 percentage points. Ratios for Portuguese banks were 220 basis points lower on average and in Spain they were 100 bps lower.
On a full Basel III basis, five German banks, including HSH Nordbank and DZ Bank, would have failed, compared with just one - Muenchener Hypothekenbank - in the standard test.
But in Sweden, Denmark, Norway, Britain, Poland and Hungary, there was almost no difference between the full Basel III rules and the transitional numbers, because national regulators have effectively fully implemented the rules already.
"There is a sort of dual speed of implementation of Basel III capital rules. Different speeds and implementation standards will not go away anytime soon," Moody's' Schuler said.
The pace at which Basel III is adopted is most relevant for big banks "where regulatory requirements are likely to put more and more pressure to build thicker and thicker capital buffers," said Antonio Guglielmi, analyst at Mediobanca.
Analysts said Santander's full Basel III ratio of 7.3 percent, compared with 8.9 percent on transitional rules, looked low for a "systemically important" bank - one so big that its collapse could trigger a financial crisis.
The phasing of Basel III rules is a complex issue that includes how banks make deductions to capital for deferred tax assets and intangible assets.
Analysts said some banks' full Basel III figures were excessively distorted: for Greek banks they did not include this year's capital raisings; Bank of Ireland's were hit by the government's preference shares; and others were hurt by treatment of deferred tax assets.