Euros
European banks must provide a 10bn Euro capital shortfall to prove they could withstand another financial crisis.Reuters

Lloyds Banking Group has "narrowly" passed a financial stress test ordered by European financial regulators to identify banks at risk of collapse in the event of an economic downturn.

Lloyds, one of four banks tested by the European Banking Association (EBA), nearly failed a benchmark set for banks to prove they are financially robust enough to withstand another banking crisis.

While Lloyds, the Royal Bank of Scotland, HSBC, and Barclays all passed the test, Lloyds only had a "capital under adverse scenario" of 6.2%, slightly above the benchmark set by the EBA of 5.5%.

The aim of the stress test is to make sure banks in Europe still have enough capital to continue lending to small and medium-sized businesses (SMEs), which rely on banks for credit, during another recession.

Across Europe 24 banks failed the stress test, based on a review of their finances up to the end of 2013. They include nine Italian banks, three Greek banks and three Cypriot banks. The worst affected was the Italian bank Monte dei Paschi, which had a capital shortfall of €2.1bn (£1.65bn, $2.6bn).

Ten banks have taken measures to bolster their balance sheets in the meantime. The remaining 14 banks in the eurozone have nine months to increase their capital buffers against losses, or risk being shut down.

Second health check

At the same time the European Central Bank (ECB) has conducted its own investigation into the financial health of Europe's banks, with similar findings.

The ECB healthcheck – the findings of which were leaked by Bloomberg this week – found 13 of Europe's 130 biggest banks failed the stress test after an in-depth review of their finances.

Collectively the 13 banks must increase their capital buffers against losses by €10bn.

The ECB said 25 banks in all were found to need stronger buffers, but that 12 have already made up their shortfall.

The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers.

The stress tests are an important step towards the ECB's takeover as a central banking supervisor, under the Single Supervisory Mechanism scheme, on 4 November. This move is aimed at weeding out financial problems within Europe's largest banks before the ECB takes the role of central banking supervisor. The ECB is tasked with enforcing tough regulations on national banks, which governments may shy away from.

The European Commission said the tests had been "robust exercises, unprecedented in scale and among the most stringent worldwide".

"Yet there is no room for complacency," a statement said. "Rigorous and timely follow-up actions to the results of the exercises will be absolutely crucial."