Two Irish banks have been stress tested as part of an EU-wide exercise by the European Banking Authority (EBA).

Allied Irish Banks (AIB) and Bank of Ireland are projected to have sufficient capital in the event of financial shocks.

This is helped significantly by each bank building up capital buffers in recent years.

In the adverse scenario by the EBA, "significant" financial risks are assumed - for example, shocks which increase credit losses and reduce income.

Commenting on the tests, Mary-Elizabeth McMunn - director of Credit Institutions Supervision at the Central Bank of Ireland - said: "While challenges remain, the ability of both banks to withstand shocks has improved compared to the last EU-wide stress test performed two years ago, with lower capital depletion and higher capital ratios in this year's exercise."

While AIB's Chief Financial Officer Mark Bourke said: "Our result of 11.8% fully loaded CET1 in the adverse scenario demonstrates our high capital base and resilience.

"With a fully loaded CET1 of 17.9% in September 2018, continued reduction in NPEs and a growing loan book, the balance sheet continues to strengthen and risk profile improves."

"More resilient" to financial shocks

Overall, the EBA said all 33 banks supervised by the European Central Bank (ECB) are "now more resilient" to financial shocks.

The banks' average capital buffers are higher, despite larger capital depletion under a more severe scenario than in 2016 stress tests.

They are also showing a strong capital buffer build-up, alongside efforts to address legacy assets.

The EBA said: "Despite a more severe adverse scenario than in the 2016 stress test, the average CET1 capital ratio of all 33 banks after a three-year stress period was higher at 9.9%, up from 8.8% two years ago."

In total, the EU-wide stress test covered 48 banks - representing 70% of banking assets in the EU.

The 33 participant banks under the ECB's supervision account for 70% of Euroarea banking.

Built up capital

Danièle Nouy is chair of the ECB's Supervisory Board.

"The outcome confirms that participating banks are more resilient to macroeconomic shocks than two years ago.

"Thanks also to our supervision, banks have built up considerably more capital, while also reducing non-performing loans, and among other things, improving their internal controls and risk governance.

"Looking ahead, the test helps us to see where individual banks are most vulnerable and where clusters of banks are most sensitive to certain risks."

But the ECB added: "The overall high level of resilience achieved by the Euroarea banking system, however, should not hide the fact that challenges remain"

It said there is still work to be done on business models and legacy issues - and that it will carefully monitor these areas.