Martin Steward examines the fallout from the European Banking Authority's recent stress tests.

Portuguese banks have borne the brunt of investors' ire in the bond markets, despite that fact that five of the nine banks that failed last Friday's European Banking Authority stress tests were Spanish.

The four largest Portuguese banks all passed the test, but the two that will need to raise more capital to meet the 2012 requirements were punished. The yield on the 2012 bond issued by Banco Comercial Português (BCP) has jumped from 5.15% to 17.80% this year - and it stood at 9.60% just a month ago. The bank's equity was down 3.2% in early trading on Monday July 18. A similar sell-off has hit the 2012 issue from Espirito Santo Financial Group.

In Spain, while the bank with the weakest stressed core tier one capital ratio, CAM, saw its shares drop 4.5% as the markets opened on Monday, and its 2014 bond yield rise from 5.16% early in July to 6.06% today, the 2012 bond yields for fellow failures CatalunyaCaixa and Banco Pastor remain below their November 2010 highs. Investors are a little more worried about the medium-term, selling CatalunyaCaixa's 2014 bond up to a 6.03% yield early on Monday morning from 5.26% at the beginning of July.

Elsewhere there was strong performance from perhaps unexpected quarters. Greece's ATEbank delivered the worst stress test results of any bank but, like its compatriot Eurobank EFG, it was tested on capital levels in place before recapitalisations this year: their shares were up 7% and 1.5%, respectively, in early trading on Monday.

Similarly, the shares of the two large listed Irish banks, Irish Life & Permanent and AIB, were up 5% and 17%, respectively, first thing on Monday. Both delivered healthy capital ratios in the test, thanks to government-funded recapitalisations. Although one might expect high capital ratios to benefit bond rather than equity holders, AIB's 2013 bond traded at higher yields on Monday morning, hitting 22.46%, having been as low as 4.16% in August 2010.

Irish Life & Permanent's 2013 bond has traded similarly, and now yields more than its 2015 bond. This is perhaps a warning that today's stellar equity performance is merely a reflection of the low base from which it starts, equity having been all but wiped out over the course of the financial crisis.

Weak test scores at RBS and Unicredit were rewarded with falls of more than 3% in share prices on Monday morining but, in a sign that investors are alive to the possibility that high capital ratios may not be the best thing for returns, the top banks in the tests, BBVA, HSBC and Intesa Sanpaolo, also saw their equity and debt being dragged down.

European banks themselves appear relatively sanguine about the systemic credit situation. The three-month Libor-OIS spread - a key indicator of banks' willingness to extend liquidity to one another - is up 10 basis points to 25 basis points since the beginning of July, but still below the levels of 35 basis points or more at the start of this year, let alone the 200 basis point levels reached at the height of the crisis in 2008.