UPDATE 1-Barclays, Lloyds and Italy’s BPM fare worst in EU stress test

* Barclays, Lloyds and Banco BPM fare worst in test

* EU banking watchdog publishes results of 48 banks

* None of banks tested below key 5.5 pct capital level (Releads with test results, details, BoE comment)

By Huw Jones and Lawrence White

LONDON, Nov 2 (Reuters) – British banks Barclays and Lloyds, and Italy’s Banco BPM have fared worst in the latest European Union wide “stress test” of top lenders’ resilience to simulated market shocks.

The European Banking Authority (EBA), the EU’s banking watchdog, published the results for 48 banks on Friday in its toughest test since 2009, when it began the exercise to identify any capital holes and avoid potential government bailouts.

Analysts have said that banks failing to complete the “adverse” or toughest part of the test without preserving a capital ratio of well above 5.5 percent, when all new and planned capital rules are applied, risk having to raise more capital or sell risky assets.

While none of those tested broke below 5.5 percent, Barclays ended with 6.37 percent, Banco BPM with 6.67 percent, and Lloyds with 6.8 percent. Italy’s UBI ended with 7.46 percent.

The Bank of England said that the UK banks tested showed they could absorb the effect of the EBA stress scenario in their capital buffers.

Capital at the British banks was particularly hit due to their exposure to credit other than secured loans like mortgages. Britain’s banks are also awaiting next month’s results of a separate annual stress test by the Bank of England.

The EBA said the adverse scenario dented the core equity capital ratio across the 48 banks tested by 395 basis points when all new and planned capital rules are applied, higher than in the last test in 2016 due to credit losses.

“The outcome of the stress test shows that banks’ efforts to build up their capital base in the recent years have contributed to strengthening their resilience and capacity to withstand the severe shocks and material capital impacts of the 2018 exercise,” Mario Quagliariello, director of economic analysis at the EBA, said.

While there was no pass/fail mark, supervisors will use the test results to determine how much capital banks should be holding or which risky assets should be sold.

The latest EBA test measured banks’ ability to withstand theoretical market shocks like a rise in political uncertainty against a backdrop of falling economic growth, a disorderly Brexit or a sell-off in government bonds and property.

Europe’s banks still lag U.S. counterparts in profitability, quality of loans and cost discipline and the region’s banking index has lost more than 20 percent this year.

Thirty-three of the banks in the test are in the euro zone, where the main supervisor is the European Central Bank, which is separately testing a further 60 smaller banks. Some of these are struggling, but their results will not be published.

Reporting by Huw Jones and Lawrence White; Editing by
Alexander Smith

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