Europe’s largest banks are overall strong enough to withstand another severe economic shock even after the challenging conditions of the pandemic, results of a stress test show. The results pave the way for many banks to restart distributing dividends.

The European Banking Authority’s stress test measures the ability of banks to maintain strong capital levels and keep lending to businesses and households in a severe recession. EBA said Friday that even under one adverse scenario, the EU banking sector would keep its capital ratios at around 10% in 2023, which is considered a strong result and in line with those from U.S. peers.

Under the adverse scenario, EBA assumed a cumulative drop in gross domestic product through 2023 of 3.6%. It said the scenario is “very severe, also having in mind the weaker macroeconomic starting point in 2020 as a result of the pandemic.” The capital depletion across the sector would be significant—$314 billion—compared with a starting ratio of 15%.

The European Central Bank, which supervises eurozone’s largest banks, recently lifted restrictions it imposed last year on dividends, but said it would take into account the stress-test results when looking at dividend policies bank by bank.

Banks with the lowest capital ratios under those conditions were Italy’s state-controlled Banca Monte dei Paschi di Siena BMPS SpA, which would see its entire capital wiped out. UniCredit SpA is currently in exclusive talks with the Italian government to take over Monte dei Paschi.

In a statement, Monte dei Paschi said the test isn’t a pass-fail exercise and that under a plan to raise capital it would perform better.

HSBC Continental Europe and Banco de Sabadell SA in Spain would have capital ratios of 5.9% and 6.5%.

Spokespeople for the banks didn’t immediately respond to a request for comment.

Deutsche Bank AG’s capital ratio would fall to 7.4% in 2023 under the adverse scenario, still above a 5.91% requirement, it said in a statement. Under a baseline scenario, its ratio would be at 13.6%, above a requirement of 10.43%.

James von Moltke, the bank’s financial chief, said the strong profit growth the bank had in the first half of the year isn’t reflected in the exercise.

Commerzbank AG , Germany’s second largest bank, said under the adverse stress test scenario, its ratio came out at 8.2% at the end of 2023.

Negative rates have curbed the ability of European banks to make profits, since they narrow the difference between what they can charge for loans compared with what they pay in deposits. The EBA said overall banks with lower margins or more focused on domestic activities saw capital levels fall more in the exercise.

EBA said the biggest reason behind the drop in capital for the banks were loans that would turn sour.

Economies around Europe improved since the severe scenario was conceived, meaning the adverse scenario is now somewhat less likely. The test was conducted in 50 banks from 15 countries and covered 70% of the EU banking sector assets, EBA said.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com