Europe's new banking regulator warned that an escalation in the eurozone crisis could pose "significant" challenges even as it announced only eight banks out of 90 had failed an annual check of their financial strength.
Of the eight banks that failed five were in Spain, two in Greece and one in Austria.
A further 16 banks were also deemed to be in a potential danger zone as they only just passed the tests, which looked at the impact on banks' capital cushions of a deterioration in the economy and house prices, the European Banking Authority (EBA) said.
However, the tests failed to consider what may happen to banks if a major European country — such as Greece — defaulted on its debt, promoting many analysts to argue the hurdles were set too low.
Leaders of the 17-member eurozone will meet on Thursday to thrash out the much anticipated second bailout for Greece.
The current market conditions are "under severe strain," said Andrea Enria, chairman, EBA. "Further deterioration in the sovereign debt crisis might raise serious challenges."
The banks which have failed will now be required to raise more capital — and pressure is likely to be exerted on those 16 banks whose core tier one capital ratio was between 5% and 6%.
All Britain's banks — bailed out Royal Bank of Scotland and Lloyds Banking Group as well as Barclays and HSBC —passed though they suffered a 25% reduction in their capital cushion during the adverse scenarios imposed upon them by the Europe's banking authorities. Only Greek banks suffered a larger fall — of 40% —demonstrating the wide range of exposures of UK banks.
While none of the four banks in Portugal — which is being bailed out by the EU and International Monetary Fund - which were tested failed, two have pledged to strengthen their balance sheets in the next three months.