British and German banks suffered the biggest potential financial hits in the latest round of "stress tests" released by EU regulators Friday, as risks such as Brexit and Italy's debts stalk Europe's economy.
Overall, however, the European Banking Authority (EBA) and the European Central Bank (ECB) said the stress-tests showed that Europe's banks were in better shape as a result of clean-up measures undertaken since the 2008 global financial crisis.
The 2018 exercise showed that in a severe projected EU-wide recession lasting to 2020, among the worst performers would be Lloyds, Barclays and Royal Bank of Scotland in Britain, along with Deutsche Bank and a clutch of regional lenders in Germany.
The EBA's results will inform EU supervisors' discussions on whether to insist banks build up their capital cushions to guard against potential losses.
"The outcome confirms that participating banks are more resilient to macroeconomic shocks than two years ago" when the last stress tests were conducted, said Daniele Nouy, chair of the ECB's supervisory board.
"Banks have built up considerably more capital, while also reducing non-performing loans, and among other things, improving their internal controls and risk governance," she said in a statement.
"Looking ahead, the test helps us to see where individual banks are most vulnerable and where clusters of banks are most sensitive to certain risks."
Brexit was one of the factors driving the exercise. Britain is set to quit the European Union next March and is yet to agree an orderly exit with Brussels, leaving banks exposed if cross-Channel trade and financial transactions are disrupted.
Barclays, which is judged by authorities to be a "systemic" player in the European banking system, saw its top-tier capital ratio fall to 6.37 percent by 2020 from a starting level of nearly 13 percent in the projected worst-case scenario.
Deutsche Bank, which like Barclays got badly burned in the global crisis a decade ago, saw its capital ratio decline to 8.14 percent from just under 14 percent.
The figures, measuring the ratio of funds that banks must hold against a rainy day, were both uncomfortably low for systemic players with far-reaching operations across the globe.
"Our risk profile is strong," Deutsche Bank finance director James von Moltke said in a statement, arguing that the supervisors artificially worsened the bank's result by assuming past one-off losses would be repeated each year.
- Dividend stops -
Barclays and Deutsche were among 25 banks which, in the worst-case scenario laid out in the stress tests, would be required by regulators to stop paying dividends and instead build up their capital cushions.
Others in the same bracket included Britain's HSBC, Commerzbank in Germany, Santander of Spain, France's BNP Paribas and Societe Generale, ING in the Netherlands, and Unicredit of Italy.
Italian banks risk exposure to a battle playing out between Rome and Brussels over the new populist government's budget, with potentially serious consequences for their sizeable holdings of government debt.
However, they held up reasonably well in the latest stress-tests after being subject to bigger capital-raising exercises after the 2008 crisis.
Banks in bailed-out Greece were covered by a separate invigilation published in May.
A total of 48 lenders from 14 countries around the European Union and Norway were put under the EBA's microscope between January and October.
The recession projected by the EBA envisaged the EU's gross domestic product plunging by 2.7 percent between 2018 and 2020.
By the end of the period, that would leave the European economy 8.3 percent smaller than if it experienced steady growth.
On top of that, the tests simulated unemployment surging to levels last seen in 2009, during the financial crisis.
The banks had it even tougher this time around compared with the last tests in 2016, as new accounting rules mean they must update their balance sheets sooner to reflect potential losses on debt or other risky assets.
But, as a whole, the EBA said its tests showed that Europe's banks were showing much better "resilience and capacity" to withstand financial shocks than a decade ago.