AIB, Bank of Ireland and Irish Life and Permanent have all passed an EU-wide financial stress test designed to assess the resilience of the institutions.

The results show Irish banks do not require additional capital beyond the levels already set out earlier this year.

The stress tests were carried out on 90 banks in 21 countries and cover 65 per cent of the EU banking system. The tests are meant to assess whether financial institutions could withstand another financial crisis.

Eight institutions, including five banks in Spain, two in Greece and one in Austria, failed. Regulators said these eight banks had a combined capital shortfall of €2.5 billion.

The European Banking Authority ( EBA), which carried out the stress tests, recommended that action be taken by the institutions to strengthen their capital position.

Sixteen other European banks were found to display a core tier ratio of between 5 per cent and 6 per cent.

Minister for Finance Michael Noonan said the stress test results “confirmed the overall soundness and resilience of the EU banking sector which should provide comfort and reassurance to businesses, consumers and investors alike”.

He added: "Together with my EU colleagues I welcome the enhanced transparency in the publication of the test results and in the disclosure of sovereign exposures of participating banking groups."

AIB said it had a net exposure to Spain of €335 million, €816 million to Italy, and a €40 million to Greece.

Bank of Ireland had a net exposure to Spain of €1.95 billion, €895 million to Italy, and a €182 million to Greece.

Irish Life and Permanent has an exposure of €71 million to Spain, €117 million to Italy and no exposure to Greece.

The Agricultural Bank of Greece, Austria's Oesterreichische Volksbanken and Spain's Banco Pastor were among those named as having insufficient reserves to maintain a core tier 1 capital ratio of 5 per cent in the event of an economic slowdown or recession.

German finance minister Wolfgang Schäuble said the results showed German banks do not need to adjust their capital base. All 12 participating German banks passed the test.

"No further adjustments are needed for Germany because the owners of the participating German banks have already taken measures to strengthen capital, inasmuch as this was necessary based on the result of the stress scenario," he said. “The results of the stress tests clearly show that the European banking sector as a whole can withstand considerable strain," he said.

The assessments are the first by the authority since it was set up earlier this year.

Last year's tests by its predecessor were criticised for not being tough enough because banks were shown to need only €3.5 billion more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months.

The test required the 90 lenders to reveal their profit forecasts, a breakdown of their sovereign bond holdings and funding costs.

Banks were deemed to have failed if they slid below a 5 per cent core capital pass mark in the face of a theoretical slide in stock, bond and property prices during a two-year recession.

The EBA did not force banks to explicitly haircut sovereign bonds held in their long-term banking book, but told them to include the estimated hit of potential losses from holdings based on a theoretical four notch credit rating downgrade, which would mean a low rate country like Greece had defaulted.

Under the test, banks would take a 15 per cent "haircut" on Greek bond holdings, while most market experts expect to see up to half the value of those bonds wiped out at some point.

Failed banks must now produce firm plans by September to plug capital shortfalls by the year-end, with their home government ready to step in with taxpayers' money if needed. Lenders that scrape through the test will also be expected to shore up their capital buffers.

Critics say the health check failed to reflect market expectations that Greece will default on its debt in some form, which would pile up losses for German and French banks that hold large amounts of the country's debt.

This is the third and toughest test of lenders in the European Union since the global financial crisis, which began four years ago - last year's gave Irish banks a clean bill of health shortly before they collapsed into State control.

In a joint statement issued this evening Internal Market Commissioner Michel Barnier and Economic and Monetary Affairs Commissioner Olli Rehn said the result showed that the majority of European banks are now much stronger and more able to resist shocks than previously.

Additional reporting: Reuters/Bloomberg