BCS Barclays PLC

European regulators gave most of their banks a clean bill of health Friday, with only a clutch of lenders struggling to ride out an economic meltdown.

The European Banking Authority presented results of a test showing how much capital banks would have left on their balance sheets after a severe downturn.

At the bottom of the pack of 51 banks sat Italy's Banca Monte dei Paschi di Siena Spa, confirming that the bank needs to raise substantial fresh funds. Other major banks that were hard hit by the test included, UniCredit SpA, Barclays PLC and Deutsche Bank AG.

The stress-test outcomes didn't include a black-and-white result for each bank, however. That is because unlike previous European stress tests, the banks didn't have to meet a specific capital hurdle to pass the exam. With no set, pass or fail criteria, the EBA left it up to investors and regulators to interpret the results.

Broadly, investors were looking for banks to maintain at least 5.5% ratio of top-quality capital on their balance sheets after the hypothetical economic crash was applied, analysts said.

Monte dei Paschi's capital buffer was totally wiped out by the scenario in the test. The bank had a minus 2.44% ratio of top quality capital to total risk-adjusted assets when the economic shock was applied. Ireland's Allied Irish Banks also came in under the 5.5% bar with capital ratio of 4.3%. All the other banks came in at over the 5.5% hurdle.

Of the "systemically important" European banks, Italy's UniCredit fared the worst with a ratio of 7.1%. The bank is likely to raise capital later this year, according to a person familiar with the matter. Barclays, had a capital ratio of 7.3%. Deutsche Bank AG, whose capital levels are being closely scrutinized, had a 7.8% capital level.

Regulators will use the numbers to calculate each bank's capital requirement later in the year. Underperforming banks could be guided to hold more capital by regulators, but authorities are unlikely to force wide-scale recapitalizations. Alternatively, banks could face tougher "qualitative measures" such as improving risk controls.

The European Central Bank and the Bank of England have in the past said that their banking systems have enough capital. In total the banks in the test raised €180 billion ($199 billion) of capital between the end of 2013 and the end of 2015. The issue now is how to clear a mound of bad loans festering on bank balance sheets.

This year's stress tests didn't include struggling Greek and Portuguese banks. Smaller lenders are being privately tested by regulators and the results won't be made public.

Write to Max Colchester at max.colchester@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

July 29, 2016 16:55 ET (20:55 GMT)

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