Malta’s two largest retail banks have passed a Eurozone-wide stress test, a review by the European Central Bank shows.

The year-long probe evaluated the strength of the loan portfolios issued by Bank of Valletta and the subsidiaries of international banks, HSBC and Deutsche Bank.

The results showed that the three banks had no capital shortfalls in both a baseline and adverse scenarios analysed by the ECB.

Bank of Valletta’s results showed that the bank had adequate capital reserves to cover loan provisions.

The results were expressed in a ratio known as CET1, a widely-used measure of resilience to unexpected losses, which relates the risks assumed by a bank to its regulatory capital and reserves.

BOV had a CET1 ratio of 13.2 per cent on a baseline scenario when the threshold set by the ECB was eight per cent and scored a ratio of 8.9 per cent on the adverse scenario, way above the threshold of 5.5 per cent.

HSBC Malta was analysed as part of the holding company based in the UK. Under the baseline scenario, HSBC Malta’s lowest CET1 ratio stood at 9.26 per cent, exceeding the ECB’s threshold of eight per cent. Under the adverse scenario, the bank’s lowest CET1 ratio was 8.91 per cent, exceeding the threshold of 5.5 per cent.

The comprehensive assessment was a financial health check on banks that started in November 2013 and took 12 months to complete. Results for all banks were published today at noon by the ECB, which shall assume responsibility for the direct supervision of these banks on November 4.

BOV and HSBC are significant credit institutions in Malta because together they account for more than 50 per cent of the national banking sector as required by the ECB test. Deutsche Bank has no retail sector in Malta and consequently has little economic impact despite the high volumes of money it manages.

The Malta Financial Services Authority and the Central Bank of Malta said in a statement that the overall results confirmed the “soundness and resilience” of each of the three banks analysed.

BOV chairman John Cassar White said the results would serve to boost market confidence in the “strength and stability not only of BOV, but of the entire Maltese financial system”.

“BOV will continue to be vigilant in the management of risks and will strengthen its corporate governance to ensure that it continues to perform its role in a sustainable and effective way,” Mr Cassar White said.

25 European banks failed the checks at the end of last year but most have since repaired their finances.

The ECB found the most critical problems to be in Italy, Cyprus and Greece but concluded that banks' capital holes had since chiefly been plugged and that only 10 billion euros remained to be raised.