The European Banking Authority published eagerly awaited results of its 2016 stress tests on Friday evening and to the surprise of many observers, Italian banks were far from bottom of the pack.

Although the tests showed the beleaguered Monte dei Paschi (BMDPF) imploding during the EBA's so-called adverse scenario, it was two Irish banks that ranked as the most exposed to an economic meltdown when Monte dei Paschi is set aside.

Under the adverse scenario, Monte dei Paschi moved from having a fully loaded common equity tier 1 capital (CET1) ratio of 12.4%, to  equity of minus 2.44%  under the doomsday scenario. All of the bank's capital buffer, including shareholders' equity and hybrid capital, was wiped out, leaving the bank a smoking ruin.

Other Italian banks scraped through tests, which the EBA insisted weren't "pass or fail." Unicredit (UNCFF) was the second weakest, although its  CET1 ratio only fell to 7.1%. Intesa Sanpaolo (ISNPY) and Banco Popolare (BPSAY) had CET1s of 10.2% and 9% respectively by the time that the adverse scenario had run its course.

Despite its implosion during the tests, Monte dei Paschi's stock was the strongest performer of all Italian banks on Monday morning as investors appeared to bet that that the poor stress-test performance could increase the momentum behind a private sector rescue that the bank has in the pipeline.

Monte dei Paschi said  on Friday, "The transaction announced today...significantly mitigates the negative impacts of the exercise."

The planned rescue will, if successful, involve the sale of nearly €10 billion of bad loans and up to €5 billion of new capital being pumped into the balance sheet.

However, analysts at Barclays have warned against excessive optimism stemming from the rescue, stating that the loan sale would be difficult to replicate for the entire sector given the sheer scale of the bad debt pile.

They also note the 0.33 price achieved for the Monte's bad loan portfolio. Looking toward UniCredit they say "marking the NPLs at 33c could see the CET1 ratio fall below the SREP." Implying that UniCredit may soon need to scale up asset sales or seek another avenue through which it can boost capital. 

Monte dei Paschi stock rose by as much as 17% on the opening in Europe, to reach a previous Jul -high of €0.35, before paring gains. Banco Popolare shares also rose by as much as 8%, to reach a one-month high of €2.70, after the smaller lender recorded the second strongest performance of all Italian banks in the test with a closing CET1 of 9%.

Shares of Intesa Sanpaolo and UniCedit rose in tandem with their smaller compatriots but later fell back into negative territory.

With Monte dei Paschi set aside, and contrary to popular expectations for a bloodbath among Italian banks, it was the two Irish banks featured in the tests that actually fared the worst.

Allied Irish (AIBYY) and the Bank of Ireland (IREBY) both did poorly, with the CET1 capital ratio for Allied having fallen from 13.1% to just 4.3% during the adverse scenario, a level which is below the international minimum of 4.5% mandated by the Basel accords. Bank of Ireland also saw its CET1 fall markedly, from 11.2% to 6.1%.

Allied Irish said: "The EBA stress test is based on a 2015 static balance sheet and does not reflect current or future improved financial performance."

Bank of Ireland said: "The group expects to maintain sufficient capital to meet, at a minimum, applicable regulatory capital requirements plus a management buffer."

Both banks were bailed out by the Irish taxpayer during the financial crisis and both could now face draconian capital targets from the ECB when it sets its 2017 capital targets later on this year. Bank of Ireland stock fell by more than 5% in early London trading on Monday, to trade as low as €0.1770, approaching lows not seen since the height of the European debt crisis.

The EBA tested 51 banks operating across Europe by modelling changes to the balance sheets of each during what it describes as an adverse scenario.

The scenario assumes a three-year long economic downturn with a number of features likely to place stress on bank balance sheets, including a sudden increase in funding costs, a liquidity crunch in secondary markets and financial stress within the so-called shadow banking sector.