EUROPEAN SHARES hit a five-week closing high yesterday, helped by banks basking in the glow of their stress test results published late last week.

The premium investors demand to hold Irish, Spanish and Greek bonds over German bunds declined as the findings boosted demand for assets perceived to be higher risk.

On the Irish market, Allied Irish Banks (AIB) was lifted about 5.5 per cent to 95 cent, while Bank of Ireland added almost 5 per cent to close at 78 cent.

Both banks had traded well in US markets on Friday evening after it was announced they had passed the stress tests.

Banks across Europe, including Barclays, Dexia and Société Générale, gained 4.5-9.1 per cent yesterday.

However, there was growing scepticism that the stress tests were not severe enough.

“It was a political exercise. It wasn’t anything more than that,” a Dublin-based broker said.

However the market is “buying into it” for the time being, he added.

“The key criticism is that the stress tests in respect of exposures to peripheral euro-zone sovereign debt were rather light,” NCB stockbrokers said in its morning note.

Twenty-four of Europe’s biggest banks would fail the region’s stress tests and show a combined capital shortfall of €15 billion if the exams were to have included losses on sovereign bonds held on lenders’ banking books, according to Citigroup.

The banks’ tier-one capital ratios would fall below 6 per cent.

This figure was the threshold set by European regulators for passing, Ronit Ghose and other Citigroup analysts said in their note to clients yesterday.

The banks that failed the Citigroup assessment include 12 Spanish banks, seven from Greece and Cyprus, three German lenders and one bank each from Italy and Ireland.

Regulators carried out stress tests of the European Union’s 91 largest banks to examine if the region’s financial firms could withstand an economic slump and a sovereign-debt crisis.

The test showed that seven lenders failed and exposed a combined capital shortfall of €3.5 billion.

The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity.

That approach ignored the majority of banks’ holdings of sovereign debt, analysts have said.

Citigroup said that it used the stress-test data and applied an additional discount on banks’ sovereign-debt holdings in the banking books.

On the bond market yesterday, Spanish debt led gains by so- called peripheral euro-region nations.

The yield on the Spanish 10-year bond fell 12 basis points to 4.27 per cent, sending the yield premium, or spread, investors demand to hold the securities instead of bunds down 17 basis points to 148 basis points.

The Irish 10-year spread over bunds narrowed slightly to 259 basis points. – (Additional reporting by Bloomberg and Reuters)