The Committee of European Banking Supervisors (CEBS) EU-wide stress testing exercise report has claimed that UK banks are well placed to handle further occurrences of economic stress.

The Financial Services Authority (FSA) has welcomed the stress test, which aimed to understand the extent to which banks are prepared should the economic environment enter another downward spiral.

The CEBS focused on three scenarios – a benchmark stress, a more adverse macro-economic stress and a country-wide stress, and applied this to a sample of 91 European banks.

The benchmark stress looks at movements in parameters such as GDP, unemployment and interest rates, and charts a mild deviation from the pathway which the economic is currently following. Conservative assumptions about the loan losses are made, and the adverse stress test is then applied. This assumes a three percentage point deviation of GDP for the EU, compared to the European Commission’s forecasts over the two-year time horizon.

A sovereign stress was then applied by the CEBS, which tested the resilience of banks to an increase in government bond yields issued by EU member states.

The FSA said the CEBS is different but complementary to the FSA’s stress testing regime, which also showed high level results for the UK banks. This resilience, the regulatory body said, is a result of the “considerable work that has been undertaken to strengthen UK banks in recent years”.

M&G said the stress tests, however, were looking at the wrong criteria. “It’s not just the asset side of the balance sheet that needs stressing or fixing,” explained Tamara Burnell, head of financial institutions credit analysis, “it’s the liability side. Clearly most banks are failing the market’s ‘funding test’, since they can’t fund without government support of some sort. To this end, and irrespective of all the issues about whether the list of institutions was full enough, the stress tests were always going to be a bit of an irrelevance. It’s the funding model that’s broken.”

Burnell said the test should have looked at the rest of each country’s lenders, such as insurers and government agencies.

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