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What to Watch in Europe’s Bank Stress Tests

The head office of Monte dei Paschi in Siena, Italy, last month. Analysts expect the...

The European Banking Authority and the European Central Bank are set to release the results of stress tests on the region’s major banks Friday. The tests subject lenders to hypothetical economic slumps to give regulators an idea of their resilience. Investors will have a close eye on how Italy’s struggling banks fare, as well as Deutsche Bank, DB -2.79 % which has been hit hard in recent months. The EBA plans to release the results at 10 p.m. CET (4 p.m. ET).

Here’s a quick rundown of what you need to know:

Why are stress tests being carried out?

The exercise is an attempt by regulators to weed out any weakness in Europe’s banking sector in the hope of reassuring investors that the region’s lenders have enough capital to withstand any severe economic storm. Europe’s banks have had a tough year, with low and negative interest rates...