EU FINANCE ministers have agreed in principle to toughen the parameters of a round of stress tests on leading European banks, an exercise deemed necessary due to flaws in the Irish element of a large EU-mandated stress test last summer.

The decision to sharpen the criteria for the test came as European ministers agreed to intensify their efforts to expand the scope and scale of the euro zone bailout fund, known as the European Financial Stability Facility (EFSF).

They remain far apart on this question, however, and the strain on the EU authorities was further underscored by renewed pressure on Portuguese bond yields, which rose again above 7 per cent for the first time in more than 10 days.

A senior European diplomat said the latest stress test will examine the condition of AIB, now effectively nationalised, and that of the partly nationalised Bank of Ireland. Like its predecessor, the test will not examine the condition of the nationalised Anglo Irish Bank.

The failure of the initial test to examine Anglo has been criticised by the European Central Bank (ECB), which has said weakness in the Irish test undermined the credibility of the entire EU exercise last July. However, Anglo is now being wound down as part of the EU-IMF bailout deal.

ECB executive board member Lorenzo Bini Smaghi said last week that the assumptions regarding the Irish property market were not conservative enough. It would only have been acceptable not to include Anglo in that test if the restructuring solution for it had been identified at that time, he added.

At the time the Government was working on the basis that at least part of Anglo would remain in business. Although AIB and Bank of Ireland passed the July test, higher Nama-related losses led the Government to conclude only 10 weeks later that the banks generally required an additional €17 billion capital. The bulk of that was for Anglo.

Under the EU-IMF rescue, Irish banks are taking on yet more State capital in an attempt to wean them off ECB funding by boosting their credibility on interbank funding markets.

At the monthly meeting of EU finance ministers, British chancellor George Osborne criticised the previous stress test because it determined that only €3.5 billion was required to recapitalise seven of the 91 banks that were examined. He noted that the subsequent capital requirement for Irish banks was a multiple of that sum.

The ministers resolved to finalise the test methodology and criteria next month, including more peer review and more oversight of national regulatory authorities, which will carry out the tests in the first instance.

However, diplomatic sources said they remain divided over the extent to which, if at all, the results of their test on banks’ access to market liquidity may be published.

Still, they agreed the exercise will take account of more severe conditions in property markets. The test will also take account of sovereign debt liabilities and the potential deterioration in banks’ core tier one capital.

The adoption of tougher test criteria presents a potentially serious series of problems for European governments as they expect more banks to fail the examination. If these banks cannot raise market capital, governments will have to step forward or examine whether they should be wound down or shut.

The exercise will be organised during the spring by the London-based European Banking Authority, a pan-EU regulatory body which took office this month.

Despite their differences, the EU ministers hope the test will be concluded by the end of May with results published in June.

According to diplomats, EU governments are trying to determine how to signal to markets their response to the emergence of new capital requirements.

Ministers want to achieve a big increase in the €250 billion lending capacity of the Stability Facility, but cannot agree how.

At issue is whether that can be done by obliging euro countries to issue “joint and several” guarantees to the fund instead of individual guarantees or whether the size of the cash buffers the fund holds can be reduced while maintaining its triple-A credit rating.

Economics commissioner Olli Rehn called for urgency. “It’s important that we realise we still have a continued crisis in the sovereign debt markets.”