The European Banking Authority (EBA), which carried out the checks, found that the two banks, which control around 45% of the Slovenian market, had sufficient core capital to deal with another recession and a sovereign debt crisis, yet warned that NLB was in the "danger zone".

The country's largest bank managed to get a passing grade only with the help of a EUR 250m capital injection carried out in March of this year, show documents released by the EBA on Friday.

Under the strain of a two-year financial crisis, NLB's Core Tier 1 (CT1R) capital would drop to 5.3%, according to the EBA, which set the pass threshold at 5%.

NKBM would meanwhile see its CT1R rate at 8% in 2012 under the same scenario, giving it a comfortable buffer.

Eight out of the 90 European banks tested got a failing grade, while another 16 were found to be in the danger zone by the EBA.

Central bank Banka Slovenije said it would use the results of the EBA's health check in planning measures to shore up its financial system.

As part of this, the central bank will step up oversight over NLB, which it had tasked recently with securing a fresh EUR 250m capital injection.

For its part, NLB highlighted that the method used by the EBA for the tests failed to take into consideration ongoing divestment by the bank undertaken as means of strengthening its capital position.

"The results fail to differentiate between banks which...have taken additional measures to improve capital adequacy and those who are not undertaking such activities," the NLB said in a press release.

It said it was additionally hurt by the fact that it had made large write-offs and provisions at the end of 2010 and that the tests also failed to consider that the bank had only low exposure to sovereign debt of troubled countries.

NLB chairman Bozo Jasovic said the bank's performance in the tests did not come as a surprise, reiterating that the bank was working on ways of bolstering its capital adequacy.

The bank has engaged the owners on plans for another round of recapitalisation, said Jasovic, who added that this would help raise NLB's CT1R to 9.5%.

Finance Minister Franc Krizanic told the press in Ljubljana that the state, which holds more than 50% of NLB, had launched an intense round of talks with private investors in a bid to secure a capital hike for the bank.

Krizanic is confident that Slovenia would succeed in securing private involvement in the recapitalisation, adding that there is "quite some interest" in the NLB.

Government officials have made a point of stating in recent days that they wanted the capital hike to be carried out by private investors, after the March recapitalisation was funded almost exclusively by the state.

Talks are underway with Belgian financial group KBC, the second-largest NLB owner with a 25% stake, but the government has also allowed for the possibility of involving other private investors.

Likewise, Banka Slovenije said today that private funding must be given priority in shoring up NLB's capital, with state involvement being only an option of last resort.

The central bank's Governor Marko Kranjec said he was otherwise happy with the results of the stress tests, pointing out that the two Slovenian banks would have done even better if greater emphasis had been placed on the effects of a sovereign debt crisis.

According to Kranjec, the main problem of Slovenian banks is their exposure to the real economy, which makes improving the financial structure - reducing debt and dependence on foreign sources of finance - in this sector a priority.

While most reactions in Slovenia focused on NLB, the pass for NKBM did not go unnoticed by its chairman Matjaz Kovacic, who labelled it as confirmation that "we have taken the right business decisions at the right time".

Unlike the NLB, which reported a record loss of EUR 202m for 2010, the NKBM has continued to operate with a profit, reporting net earnings of EUR 11.4m for last year, although it too has been hit by the decline in the country's construction sector.

NKBM, which controls around 10% of the Slovenian market, had to make provisions and write-offs of EUR 83m last year, compared to the NLB's EUR 477.3m.