Global markets react with caution after seven banks fail European stress tests

European supervisors announced after the London market closed that seven of 91 banks tested had failed, most of them in Spain. All four big UK banks passed, as did the Irish banks. The tests were designed to predict whether banks could survive under tougher economic conditions.

In the US, the Dow Jones industrial average gained 14 points in early trade, sticking to the tight range it traded in throughout the day. While major indices were not moving much after the results, the euro slipped modestly against the dollar. The euro fell to $1.284 in afternoon trading.

Analysts say the criteria used for the tests is more important than the results themselves. David Chalupnik, head of equities at First American Funds, said investors wanted to be sure the tests were rigorous enough to show which banks would struggle if the economy worsened.

Few details of the scenarios used to test the banks have been released, but they could eventually remove some uncertainty about whether rising government debt in many European countries is hurting financial companies.

The continent's debt problems have sent stocks falling worldwide since April amid concerns they could slow the global economic recovery.

Brian Peardon, a wealth adviser at Harrison Financial Group, said the true impact of the tests on the market won't come until next week because there is so much information to sort through. "It will take the weekend to digest whether they're good or bad," he said.

Another City trader said the European Central Bank (ECB) stress tests have posed more questions than they have answered. Mark O'Sullivan, director of dealing at foreign exchange firm Currencies Direct, said: "As expected, a handful of small Spanish unlisted saving banks and a Greek bank have failed the EU bank stress tests.

"What seems to have occurred is a compromise amongst European banking regulators, with many questioning if the bar had been set way to low in testing the European banking sector.

"It seems the tests may have raised more questions than they have answered and in the coming weeks it will be the interbank lending markets that will have the real answer as to whether real confidence has returned to the European banks."

The UK banks were always expected to pass, essentially because they had already been refinanced and tested by the UK authorities.

The British Bankers' Association said: "UK banks have already put in the work to rebuild their businesses and put more money aside against future financial problems. It is no surprise to find they have exceeded the standards set out by CEBS to ensure banks across Europe are well placed to weather any future financial problems.

"Stress testing is a useful tool to manage risk and inform strategy. Banks have undertaken stress and scenario tests for many years on the basis of bilateral discussions between themselves and their regulators.

"The BBA has always supported stress testing, but feels the long-standing bilateral approach is more appropriate as it avoids misinterpretation and adverse effects on institutions."

Royal Bank of Scotland said it remains well capitalised "It is important to note that the tests are theoretical in nature and none of the data published represent a forecast or prediction by RBS of what would actually happen in any of the modelled scenarios.

"RBS has continued to make good progress in its restructuring plans including the de-risking of its balance sheet, and reaffirms its commitment to strong capital ratios. It regularly runs its own stress tests to ensure capital adequacy."