Three banks have failed a stress test carried out by the European Banking Authority (EBA), highlighting the volatile nature of the sector in 2023.

The EBA said on Friday that it carried out a test which saw a theoretical €496 billion wiped from the buffers of 70 banks. Of that figure, 57 were banks from the euro zone whose test was directly overseen by the European Central Bank (ECB).

The EBA described the test as its toughest yet, and said that it looked at the impact of a three-year scenario to 2025 and examined credit, market and operational risk losses on a bank's mandatory core capital buffer. Banks had an average buffer of 15% of their risk weighted assets, and saw depletion of capital buffers of 10.4 per cent by the end of the test’s third year.

While the EBA did not reveal the names of the three banks that failed the test, illuminating geographic information was revealed.

Eight of the 14 German banks tested were below the EU average for CET1 and leverage ratio. The six banks which were above the threshold were either subsidiaries of US major banks of financing arms for companies like Volkswagen.

France’s La Banque Postale meanwhile saw its capital nearly totally wiped out by the test. It said that the EBA’s testing did not reflect changes to a new accounting rule which is set to moderate the impact of market shocks.

Bank stress tests have become commonplace in the west since the 2008 global financial crisis, and are now part of routine supervision for banks.

Last week, ECB supervisory chief Andrea Enria said that the regulator will request weekly liquidity data from banks as it looks to address the impacts of interest rates rise.

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