Eight of 90 European banks flunked stress tests projecting how they would fare in another recession, and 16 more barely passed _ but analysts doubted Friday's results would succeed in restoring confidence in the continent's shaky financial sector.
Some countries challenged the results as inaccurate and overly pessimistic, saying they would not force their weaker banks to raise new cash. Economists warned that the tests were insufficient because they did not simulate the main risk hanging over Europe, a default by Greece.
While markets were sanguine about the results _ the euro barely moved _ experts questioned whether the tests achieved their goal: restoring confidence in a sector that is carrying billions of bad debt from crisis-hit countries like Greece, Ireland and Portugal.
"The publication of these results will not assuage investors' fears over the resilience of the EU banking sector," said Marie Diron, senior economic adviser for Ernst & Young.
She said the tests were useful to single out particularly weak banks, but noted that a national debt default was "the single greatest risk facing the European banking sector at present."
As it presented the results, the European Banking Authority said the failing banks should quickly raise a total of euro2.5 billion ($3.5 billion) to boost their capital cushions. The banks that barely passed were also asked to shore up their finances in coming months.
Spain, commonly seen as the next-weakest link in the 17-country eurozone, fared by far the worst in the tests. Five banks _ Catalunya Caixa, Caja de Ahorros de Mediterraneo, Banco Pastor, Unnim and Group Caja3 _ failed the test outright, while seven others barely scraped by. However, the number of banks that Spain tested was far higher than in all other countries.
The next in line was Greece, with two lenders _ EFG Eurobank and government-owned ATEBank _ flunking the tests and two others almost failing.
Austria's Oesterreichische Volksbank AG was the only lender outside the crisis countries to not pass, though German Landesbank Helaba pulled out of the tests earlier this week, saying the EBA refused to take into account some of the capital it had set aside.
The European banking regulator's decision to not count certain types of capital for its stress scenarios has come under fire from several countries and could become a major hurdle for the tests' credibility.
"I refuse to accept that the five failed the test," Bank of Spain Governor Miguel Angel Fernandez Ordonez said Friday night, insisting that none of the Spanish banks had to raise extra funds.
He complained that the EBA had refused to count general provisions, money that Spanish banks are required to set aside for a crisis such as the one envisioned in the stress tests.
German officials also questioned the tests' results, saying they saw no reason for any of their banks to take action, even though two _ HSH Nordbank AG and Norddeutsche Landesbank _ fell into the "barely passed" category.
Nordbank and Norddeutsche Landesbank both challenged the stress test results, saying they didn't reflect how strong they were.
The EBA lacks the power to force banks to raise more capital _ whether from investors or governments _ or to make them merge or sell businesses. Only their national governments can do that, and analysts say the key to the stress tests is whether governments act on the results.
"The real test of the process, and of the strength of the new European supervisory system, will be the willingness of individual regulators to follow up," said Bob Penn, a partner at commercial law firm Allen & Overy.
In addition to the Spanish, Greek and German banks that only barely passed, one bank in Slovenia, one in Italy, one in Cyprus, and two in Portugal also only just survived the EBA's stress scenario.
The EBA worked hard to make this year's test more credible after a stress test last summer was largely considered a whitewash _ it failed to spot huge black holes in Irish lenders, whose collapse weeks later pushed the country to take an international bailout.
A similar exercise in the U.S. in 2009, however, is widely credited with drawing a line under the country's banking crisis. In the U.S. stress tests, 10 of the nation's 19 largest banks had to raise a total of about $75 billion.
The EBA said Friday that the main reason so few banks failed the test was that it gave lenders the opportunity to raise capital ahead of the result's release. At the end of last year, 20 banks would have failed the tests and between January and April lenders raised a total of euro50 billion ($71 billion) in preparation for the test.
The banks were also required to maintain a bigger financial pad than last year: at least 5 percent of their loans, investments and other risky assets. That cushion _ dubbed Core Tier 1 capital _ stands ready to absorb unexpected losses and is therefore a key measure of a bank's stability.
The tests, run by national banking regulators, simulated what would happen to bank finances during a recession where growth falls more than 4 percentage points below EU forecasts, while housing prices plummet and unemployment jumps. For the 17-country eurozone, they envisaged a drop in economic output of 0.5 percent this year and 0.2 percent next year.
However, a key point of controversy was the EBA's decision not to include an explicit default in its worse-case stress scenario. Most market observers believe that a Greek default is almost inevitable, while many also expect Ireland and Portugal to eventually restructure their debts.
But even though eurozone finance ministers have been pushing for banks to share part of the burden of a planned second rescue package for Greece, the EU has said that testing for an outright default would conflict with its promise that such a move is not in the cards.
Instead, it chose to make the banks disclose exactly how much they hold in shaky bonds, including amounts and maturities. The intention is to clear the air, with strong banks no longer suspected of hiding losses and thus able to borrow more cheaply, while increasing the pressure on weaker ones and their respective governments to take remedial steps.
"The disclosure will give the markets enough information to draw their own conclusions about the banks' positions: those conclusions will be much more gloomy than the EBA's conclusions given the state of the eurozone periphery," Allen & Overy's Penn said.
Another goal was to address the so-called addicted banks, financial institutions that are so weak they can only survive by tapping emergency credits from the European Central Bank. The idea is to push governments to finally restructure or recapitalize them.
The disclosure tactic did not sit well with everyone. The Association of German Banks said that while stress tests were useful, "in the current uneasy situation on the financial markets, it cannot be ruled out that this detailed information may seriously exacerbate market volatility or could even be used for speculation against some banks."
Steinhauser reported from Brussels.