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European Union officials are preparing to pit the blocs banks against the toughest simulated recession that they have ever faced in a stress test, three people briefed on the matter said.

The European Banking Authority and the European Central Bank will next week unveil an adverse scenario for the stress tests, which start in May, that assumes the 28-nation blocs economy undershoots EU growth forecasts by a greater margin than in the exams held in 2010 and 2011, said the people, who declined to be named as the details arent yet public. Those previous tests were criticized for failing to uncover weaknesses at banks that later failed.

This time around, the stress tests adverse scenario is predicated on economic output that misses the European Commissions growth forecasts by 2.2 percentage points in 2014, 3.4 points in 2015 and 1.4 points in 2016, the people said. That probably translates into two years of recession followed by anemic growth in the last year covered by the exercise. The EBA plans to announce the details in London on April 29. A spokesman for the EBA and a spokeswoman for the ECB declined to comment.

These are really very, very unlikely scenarios, said Ricardo Wehrhahn, who helped conduct Spanish stress tests in 2012 and is now Madrid-based managing partner at Intral Strategy Execution. We are at the turning point of the economic cycle, so assuming that growth will miss like this is very stringent, he said. This will give confidence to the market that the banks that pass these tests are in a solid condition.

Stars representing nations of the European Union are seen on a Euro sign sculpture outside the European Central Bank's headquarters in Frankfurt. The ECB is running an assessment of 128 banks from Deutsche Bank AG to Bank of Valletta Plc as it prepares to assume full oversight of euro-area lenders in November, seeking to prevent a repeat of the financial crisis that threatened to splinter the currency bloc. Close

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Stars representing nations of the European Union are seen on a Euro sign sculpture outside the European Central Bank's headquarters in Frankfurt. The ECB is running an assessment of 128 banks from Deutsche Bank AG to Bank of Valletta Plc as it prepares to assume full oversight of euro-area lenders in November, seeking to prevent a repeat of the financial crisis that threatened to splinter the currency bloc.

The ECB is running an assessment of 128 banks from Deutsche Bank AG to Bank of Valletta Plc as it prepares to assume full oversight of euro-area lenders in November, seeking to prevent a repeat of the financial crisis that threatened to splinter the currency bloc. The exam, which applies to banks in the entire EU, requires banks to maintain a capital pass mark of 5.5 percent of risk-weighted assets.

The 43-member Bloomberg Europe Banks and Financial Services Index fell 1.4 percent as of 1:15 p.m. in Frankfurt to the lowest since April 15. National Bank of Greece SA, Vienna-based Raiffeisen Bank International AG and Societe Generale SA led the decline.

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Europe Banks Face Toughest Simulated Slump in Stress Test