Banks that scraped through the European Union's stress test of 90 lenders will start feeling the heat today from investors to beef up capital buffers.

The European Banking Authority (EBA) said after the market close on Friday that eight banks failed the test with a total capital shortfall of €2.5 billion.

This amount sparked a repeat of last year's accusations that the stress tests were again unrealistic given the euro zone's sovereign debt crisis.

European banks shares dipped 0.3 per cent in early trading today, as analysts said the test was not harsh enough, though it did give greater transparency on sovereign debt holdings to lift uncertainty over some stocks, and there were no nasty shocks for individual banks.

"The key positive is greater understanding and recognition of sovereign stress," Huw van Steenis, analyst at Morgan Stanley, said in a note.

Banks could need between €40 billion and €64 billion of capital, based on a test overlaying the EBA's adverse scenario with a sovereign stress using implied losses from current market prices and a minimum core Tier 1 capital level of 7 per cent, Morgan Stanley estimated.

The banks that failed were small, nearly all untraded and mainly in Spain, where banking problems have long been known.

Sixteen banks scraped through the test and analysts expect them to come under market pressure to bring capital cushions up to scratch well before the EBA's April 2012 deadline.

They include Spain's Bankia - which is planning a stock market listing on Wednesday - Popular , Sabadell and four more Spanish banks, along with Italy's Banco Popolare, Greece's Piraeus and Cyprus's Marfin.

Portugal's biggest bank Millennium BCP also nearly failed and set the tone for swift action by saying late on Friday it would raise €400 million.

The EU's third health check of banks since the financial crisis began gave more detail on sovereign debt holdings of countries at the heart of the problems than ever seen before.

Banks warned that too much transparency, such as news of BNP Paribas' €24 billion exposure to Italy, may make markets even more jittery.

BNP Paribas, Deutsche Bank and Barclays were among the biggest early fallers, each down over 1 per cent by 0710 GMT.

The sovereign data may come into its own later this week.

Euro zone leaders meet on Thursday in a bid to agree a second bailout for Greece and a package to address the broader fiscal woes of the euro zone that last week moved beyond Greece, Portugal and Ireland to Italy and Spain.

This broader package may include measures whereby banks agree to take a hit in some form on the sovereign debt they hold to give euro zone countries more breathing space to recover.

The EBA data showed Europe's banks held €98.2 billion of Greek sovereign bonds at the end of December, with two-thirds of that held by Greece's banks, 9 per cent by German banks and 8 per cent by French.

Banks' exposure to Irish sovereign debt was €52.7 billion (61 per cent held domestically) and to Portugal it was €43.2 billion (63 per cent held domestically).

This sovereign debt data has been crunched by analysts at big banks over the weekend in tests that were toughened up with default scenarios - something the EBA was barred from doing by nervous EU finance ministers.

Europe's banks would need €41 billion to keep their core capital ratio above 7 per cent, the new global minimum from 2013 under the Basel III accord and already required by markets in practice, according to Reuters' calculations.

This compares with the 5 per cent pass mark in the test.

JPMorgan analyst Kian Abouhossein said a tougher test of 27 of the bigger banks using EBA data would show 20 are a combined €80 billion short of capital.

His test applied a haircut to sovereign bond holdings in the banking book and required banks hold core capital of 7 per cent.

Credit Suisse analysts said applying larger haircuts on peripheral euro zone bond holdings, including for Italy, as per current market prices, would leave a €45 billion deficit for 49 banks it tested.

Without market pressure, some banks may not top up capital levels as some local supervisors dispute test conclusions.

Germany's Helaba pulled out of the test just before the results were announced, disputing it would have been failed. The Bundesbank said it was happy with Helaba's capital position.

In Spain, the central bank says no lender needs to raise capital.

Reuters