Top European banks are being asked to prove that they could survive turmoil in the financial world.
The European Banking Authority has released details of its plans to check the resilience of 124 lenders.
The idea is to find out how they would cope with simultaneous slumps in government bonds, property prices and share markets.
The results will be published in October.
The toughest test to date by the EU watchdog is aimed at restoring confidence in the banking industry which had to be rescued by taxpayers during the financial crisis.
Over a three-year “stress test” period – a year longer than in the previous exercise – banks must show they can cope with a cumulative loss of 2.1 percent in economic output.
That is much worse than the 0.4 percent decline in the last such test.
Such a poor economic performance would push up unemployment to 13 percent and send house prices down 20 percent on average, triggering defaults on loans held by the banks, the EBA said.
EBA Chairman Andrea Enria explained full transparency will be key to the credibility of the exercise: “It will show how efforts recently undertaken by EU banks are already bearing fruit and it will provide a common framework for the next steps to be taken by supervisors and banks.”
European insurers will face similar checks.
This all part of the response to market criticism that the EU has not been as robust in its response to the financial crisis as the United States.