Finance Minister Michael Noonan said the ‘stress test’ results highlighted the strength of the banking system and the progress made in recent years.

Analysts said the main banks – Allied Irish and Bank of Ireland – should now be in a position to release credit more easily, although they cautioned debt repayments will likely outstrip new lending for at least a year.

Four banks – AIB, Bank of Ireland, Ulster Bank and the Irish operations of Merrill Lynch International – were given a clean bill of health in the landmark review gauging whether they are strong enough to withstand another downturn.

But state-owned Permanent TSB will need to raise around €125m to help plug a capital shortfall.

It is hoped that the bank may be able to raise enough from private investors without having to write off a €400m capital buffer from taxpayers.

The tests exposed a capital shortfall in PTSB of €854.8m, but the bank said more than 80pc of this has already been addressed.

The need for capital will have no impact on customers and is not a danger to the bank itself.

And for the first time since the crisis, taxpayers are not expected to be hit for a fresh bailout of Permanent TSB.

The bank’s chief executive said he was confident that the remaining amount – and more – could be raised from international investors. The bank must set out how it will do this within two weeks, and has a nine-month deadline to raise the capital.

Mr Noonan said he was supportive of this, saying the capital raise will take place in the first half of next year.

Overall, roughly one in five of Europe’s banks failed the stress tests, which were carried out based on their balance sheets at the end of last year. But most have now already repaired their finances.

In Ireland’s case, Bank of Ireland, AIB, Ulster Bank, Permanent TSB and the Irish operations of US banking giant Merrill Lynch international all passed when tested under normalised economic conditions.

But as had been widely expected, PTSB came up short under the so-called adverse scenario, ie, if another economic crisis had kicked off from the start of this year. Under such circumstances, the bank was regarded to have had enough capital for this year, and next year, but fell short for 2016.

Win-win

In spite of this, Tom McAleese, managing director with Alvarez & Marsal’s Financial Industry Advisory Services in London, said the results of the tests should prove to be a win-win for Ireland.

“The conclusion of these stress tests will bolster confidence across the banks and should lead to a boost in lending into the Irish economy,” he told the Irish Independent. Fiona Hayes, analyst with Cantor Fitzgerald Ireland, said it should be beneficial for new lending and added that it was an “important hurdle to cross”.

But she cautioned that loan repayments would likely outweigh any new lending for up to a year, and said that proposed new lending restrictions by the Central Bank on mortgages could also prove to be “unhelpful.”

Eamonn Hughes of Goodbody Stockbrokers, said the tests provided more clarity on the banking landscape. “It is supportive in terms of lending growth. There’s underlying (loan) redemption rates that are a headwind, so we wouldn’t see the balance sheets grow in 2015. But we would start to see them grow in 2016,” he said.

Although investors may take heart, it remains to be seen whether the exercise can spur banks across the eurozone as a whole to lend more as the region’s economic growth stutters to a virtual halt. ECB Vice President Vitor Constancio said the results could encourage banks to lend.

But University of Limerick economist Stephen Kinsella isn’t convinced. “It’s not going to affect real credit growth in the economy one way or the other,” he said.

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