EU banks face homes slump in bleakest stress-test scenario

European Union banks will be ranked on how well they can withstand a 21.2 percent slump in home values, coupled with a surge in unemployment and plummeting economic growth, as part of the bleakest scenario in the most severe EU stress test to date.

The exams will also simulate a 19.2 percent drop in stock prices over three years, as well as a 14.7 percent fall in commercial real-estate prices across the 28-nation EU, the European Banking Authority said in a statement. The Hungarian forint and Polish zloty will lose a quarter of their value under the so-called adverse scenario to express losses on mortgage lending in central and eastern Europe.

As the European Central Bank prepares to take over supervision of about 130 euro-area lenders from BNP Paribas SA to National Bank of Greece SA starting in November, regulators have sought to compile the toughest stress tests in a bid to repair credibility damaged by assessments in 2010 and 2011 that didn’t uncover weaknesses at banks that later failed.

“The exercise’s full transparency will be key to its credibility,” Andrea Enria, chairman of the EBA, said in the statement. The tests will form a “robust and effective tool for supervisors to address remaining vulnerabilities in the EU.”

The exams will simulate output that misses the European Commission’s growth forecasts in 2014 through 2016 by a cumulative 7 percentage points with a corresponding rise in unemployment to 13 percent and stagnant consumer prices.

The scenarios address criticisms of the 2011 test, which modeled the effect of a fall in output of 0.4 percent that year, followed by a year of static growth in 2012. The adverse scenarios then were overtaken by reality a year later. Economic activity fell 0.4 percent in...