By Colin Barr
July 23, 2010

Just seven banks failed Europe’s stress tests, officials said Friday.

That means 92% of the continent’s lenders passed the tests, whose results were announced Friday by European officials led by the Committee of European Banking Supervisors.

The supervisors, together with national governments and the European Central Bank, conducted the tests in a bid to quell fears about the Continent’s finances at a time of intense economic uncertainty.

So far, so good. None of the banks that fell short of regulators’ capital requirements in a so-called economic stress situation are major lenders, and U.S. markets accepted the results with a shrug. Stocks were mixed and the euro was steady against the dollar after an earlier decline.

Five of the seven failures came in Spain, with one each in Germany and Greece. No major banks failed the tests.

Failing institutions will have to raise capital, either in the market or from their government. One of the failing banks, Germany’s Hypo Real Estate, is state owned.

The other failing banks are the Spanish regional lender Cajasur, the Spanish savings banks Civica, Espiga, Diada and Unnim, and the Greek Atebank.

Among the banks saying the passed are ING

of the Netherlands, Banco Bilbao

and Santander

of Spain and Deutsche Bank

of Germany.

Policymakers published the test results in hopes of restoring confidence to European funding markets, which have been wracked by fears that a sovereign debt default will lead to another slew of bank failures.

There are some signs the tests are already having some of their desired effect by prompting banks to raise capital. Three smaller European lenders announced Friday they would raise funds, the Financial Times reported.

The design of the test raised some eyebrows in the markets. Bloomberg reported Friday that supervisors would discount the value of sovereign bonds held by banks, but only for those bonds held in the banks’ trading accounts.

Bonds the banks say they plan to hold to maturity wouldn’t be discounted under the test, Bloomberg said. Shortly after the disclosure, the euro tumbled to $1.28 from $1.30, suggesting traders were questioning whether the exercise will actually restore confidence in a European recovery.

But the euro crept back to $1.29 after the results were released. The announcement came after European stock and bond markets closed for the day.

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