European banks ace U.S. stress test, show strong capital levels

European banks ace the U.S. Fed'sFed's stress test, show strong capital levels. A logo is pictured on the Credit Suisse bank in Geneva.

WASHINGTON LONDON Reuters - The US units of major European banks including Deutsche Bank, Barclays and Credit Suisse sailed through the Federal Reserve's annual stress tests on Thursday, showing they have enough capital to weather an economic shock.

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

It was 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 banks was 15.2%, compared to 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%.

The Fed assesses how banks' balance sheets would fare against a possible economic downturn, under its annual stress test exercise after the 2007 -- 2009 financial crisis. How much capital banks need to be healthy and how much money can they return to shareholders, the results determine how much capital banks need to be healthy.

The jobless rate went to 10% and the economy contracted 3.5% this year, due to a slump in commercial real estate asset values.

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

The scenarios were devised before Russia's invasion of Ukraine and a surge in inflation, but they should assure policymakers that Europe's top lenders are resilient enough to withstand a possible recession this year or early 2023, according to the tests.

The Bank of England said this month that it was satisfied that lenders were no longer too big to fail, although it also called for more clarity about how much liquidity a major bank like HSBC would need if they were to be wound down in a future crisis.

The European Banking Authority is scheduled to conduct 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 start 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.

Here is an EXPLAINER on the stress tests :