This Friday sees the release of results of the much-awaited stress tests on the balance sheets of the 91 biggest banks across Europe to determine if they have sufficient levels of capital to withstand future losses.

Given the precarious position of the Irish banking system for the last two years, international commentators were quick to forecast that the two Irish lenders being assessed by the Commission of European Banking Supervisors (CEBS) ? AIB and Bank of Ireland ? would be among those to fail.

The stress tests were ordered to finally help ease concerns about the health of the European banking system amid the sovereign debt crisis. However, according to market and regulatory sources, there is increasing confidence that Irish banks may just about scrape over the line with an unexpected pass. The government has been keen to talk up the prospects of the domestics banks, with finance minister Brian Lenihan last week saying they should have fewer problems than banks in other countries in passing the CEBS tests.

While a certain amount of patriotic rhetoric is being used – governments across Europe have all said their banks will pass, even those in debt-laden nations – Lenihan's optimism isn't without foundation.

According to sources, Financial Regulator Matthew Elderfield is said to be in "confident mood" about the outcome of the CEBS tests. The regulator applied fairly rigorous tests to the banks when carrying out his Prudential Capital Assessment Review of five Irish banks back in March.

The scenarios underpinning that assessment assumed the economy would continue to stagnate, unemployment would reach nearly 15%, mortgage defaults would hit 5% and land values in Ireland would slump 60% from peak by the end of 2012. Market sources say those assumptions were fairly aggressive and are unlikely to have been the basis for the CEBS tests. So far, very little is known about what scenarios CEBS is employing, except that growth in the European economy will be three percentage points worse than the European Commission's forecast.

The CEBS will include one element in its current tests which was not calculated by Elderfield, that of losses the supervisors will force banks to take on government bonds they hold. Analysts at JP Morgan Cazenove, which expects AIB and Bank of Ireland to be among 14 of the 91 banks who fail, estimates the haircut on European government bonds as high as 17% for Greek debt and 8% on Irish bonds.

"From a market point of view, the main focus is on the sovereign element," NCB Stockbrokers analyst Ciaran Callaghan said. "They [AIB and Bank of Ireland] don't have too much Irish sovereign exposure. AIB had roughly €4bn and Bank of Ireland has about €1.1bn. They have very little material exposure to the other peripheral European countries."

Of greater concern for AIB and Bank of Ireland is whether the CEBS will treat the bonds banks receive from Nama for their toxic property loans as sovereign exposure and force them to take a haircut on it. The treatment of the Nama bonds is complicated as they are not counted as government debt by the European Union because a special purpose vehicle controlled by private investors owns 51% of the Nama SPV. The Financial Regulator said it couldn't comment on the details of the stress tests.

The results of the stress tests will be published on 23 July. It is not known how much details will be revealed, though it is expected to give a pass or mark on a bank-by-bank basis. It isn't known what recommendations CEBS may make to those that fail, though ordering them to raise cash is the most likely demand. The European Union is still divided about whether those that fail the tests will have access to the €750bn joint rescue fund controlled by the EU and the IMF to make up for any shortfall in capital.

With Bank of Ireland fresh from raising €2.9bn from new and existing investors, the most likely casualty from failing to pass the stress tests is AIB.

The bank was ordered by the Financial Regulator to come up with €7.4bn by the end of the year. AIB's group managing director Colm Doherty plans to sell its 70% stake in Polish lender Bank Zachodni, its 24% share of US bank M&T Corporation and its British businesses. Those disposals are at various stages with a deal to sell the Polish bank most likely to happen first. A negative report by CEBS could increase pressure on Doherty to speed up the sale, and in the process harm negotiations with potential buyers.

Sources say AIB and Bank of Ireland can only surprise on the upside, with much scepticism abroad about whether they will pass given the scale of the losses the pair are suffering due to souring property loans.

"Most people are still fairly cautious about the Irish banks. They look at the Irish economy and see things are still difficult so it wouldn't be a great shock to the markets if they were down near the bottom," said a senior financial analyst.