By Colin Barr
July 19, 2010

Europe’s banks will have their reckoning Friday afternoon.

European banking regulators will announce the results of their stress tests at noon Eastern time Friday, the Committee of European Banking Supervisors said Monday.

The committee is coordinating efforts to check the financial soundness of 91 banks across the Continent, along with governments and the European Union. Investors have been eager to see the results of the tests, amid the latest round of questions about the stability of Europe’s banking system.

Policymakers are trying to lure funds back into the European banks at a time when some cash-strapped institutions have been leaning heavily on the European Central Bank.

European economies are struggling under heavy debt loads and slow growth prospects. Many European banks have sizable holdings of the bonds issued by troubled states such as Greece, Portugal and Spain, which has some observers worrying about another round of bank bailouts.

Moody’s on Monday issued a stark reminder of the cost of propping up banks, saying Ireland could end up paying almost a quarter of its annual economic output to stabilize financial institutions that are up to their eyeballs in bad property loans.

Even so, shares in European banks have rebounded since the latest wave of sovereign debt fears crested last month, with the likes of Spain’s Santander

and Banco Bilbao

up more than 30%.

European leaders are hoping to repeat the positive experience big U.S. banks had after the government did stress tests here. The question is whether investors will buy in at a time when many are growing less optimistic about the outlook for the world economy.

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