A machine counts and sorts out euro notes at the Belgian Central Bank in Brussels
A machine counts and sorts out euro notes at the Belgian Central Bank.Reuters

A total of 36 European banks would have failed if Europe's banking regulator had assessed them based on Basel III, a global regulatory standard on bank capital adequacy, stress test and market liquidity risk.

Last week the European Banking Authority (EBA) failed 24 banks, which had common equity of 5.5% or less under a 2014 to 2016 recession scenario, in its latest stress test. The assessment was based on transitional capital rules, which vary between countries as they introduce new regulations.

Eleven other banks would have failed if Basel III had been applied, according to data from the EBA.

"Many banks have only passed the stress test by very thin margins and/or could be challenged in meeting requirements based on fully-phased-in capital ratios. Accordingly, many banks will be expected to do more," said Carola Schuler, a Moody's managing director.

Banks' common equity – as a percentage of risk-weighted assets – was on average almost 100bp lower on a full Basel III basis than the reported ratios under the 2014/16 recession scenario of the test, according to Reuters calculations.

"Moody's believes that the European Central Bank's declared aim of restoring confidence in Europe's banking systems will take time and could be challenged by the still difficult character of the operating environment which faces the region's banks," Schuler added.

Basel III was developed as a response to existing deficiencies in financial regulation following the 2008 financial crisis.

It was agreed upon by members of the Basel Committee on Banking Supervision in 2010 to 2011, and was scheduled to be introduced between 2013 and 2015. However, the implementation deadline was later extended to 31 March, 2019.

Basel III was supposed to strengthen bank capital requirements by increasing liquidity and decreasing leverage.

The eurozone is lagging behind other economies in implementing the Basel III rules.

Earlier, the US Federal Reserve conducted a similar test on banks based on fully-loaded Basel III, which was a tougher test compared to the EBA's test.

"It's still an easier and a different test than the Fed's stress test in many, many respects," Karen Petrou, co-founder of Federal Financial Analytics in Washington, told Reuters.

"The Fed's test is very qualitative. You can get all the numbers right and still fail."