Of the institutions that failed, five were from Spain, two were from Austria and one from Greece, while a further 16 banks are in the danger zone.
The UK’s ‘big four’ banks all passed the tests, having core tier one capital ratios of above 5%.
HSBC fared best, with a capital ratio of 8.5%, while Lloyds Banking Group had 7.7%, Barclays 7.3%, and Royal Bank of Scotland had 6.3%.
The EU-wide tests included 90 institutions in 21 countries, representing 65% of assets in the sector.
The European Banking Authority (EBA) said 16 banks had a core tier one capital ratio of between 5% and 6%, but eight banks fell below the capital threshold of 5% over the two-year time horizon, with an overall shortfall of €2.5bn.
The EBA has recommended those banks that failed to meet the capital threshold should take steps to move back above the 5% level by 15 October.
It said: “The remedial measures agreed with the competent authority will have to be fully implemented by end-2011, with flexibility allowed only if justified by market conditions or required procedures.”
The EBA said the tests are designed to assess the resilience of European banks to a hypothetical adverse scenario and uses a common, conservative stress testing benchmark for European banks.
The aim is to improve transparency across the sector, identifying vulnerabilities to improve future regulation and prevent further banking failures.
Critics of the tests say it is meaningless to test banks across Europe in the same way, as they are all governed by different regulations within their individual countries which may affect how capital ratios are defined, for example.
Others say the tests are still not strict enough, despite changes made after only seven out of 91 banks failed last year. Among those that passed were Bank of Ireland and Allied Irish Bank (AIB), but the latter needed a government bailout just months later.
European markets closed lower ahead of the results, with the FTSE 100 slightly down at 5,843.66, a 0.06% fall, while the CAC 40 was down 0.66% to 3,726.59 and the EURO STOXX 50 down 0.74% to 2,675.38.
