Five of the banks are in Spain - Diada, Espiga, Banca Civica, Unnim and Cajasur – with the other two being Germany's Hypo Real Estate and Greece's ATEbank.

The adverse scenarios used in the stress test were designed as "what-if" scenarios reflecting severe assumptions which officials say are not very likely to materialise in practice.

The European Commission said the results of the test confirm the overall resilience of the EU banking system to negative macroeconomic and financial shocks, and are an important step forward in restoring market confidence.

"Where the results of the exercise indicate that individual banks require additional capital, these banks should take the necessary steps to reinforce their capital positions through private-sector means and by resorting, if necessary, to facilities set up by Member State governments, in full compliance with EU state-aid rules," it said.

The seven banks which failed the test would need a total of 3.5bn euros of new capital to meet the standards required, CEBS said.

The failed banks "will have to agree with their respective supervisors a plan over a given time period which will explain how this weakness will be resolved," said CEBS chairman Giovanni Carosio.

The stress tests were conducted in an effort to offer reassurance to investors spooked in particular by the financial crisis in Greece.