Europe needs to do a new round of stress tests on banks after Ireland's flawed vetting of lenders in 2010 raised doubts about a parallel Europe-wide health check, a European Central Bank executive board member has said.

"The fact that the Irish stress test turned out not to be credible affected all the other stress tests," Lorenzo Bini Smaghi said.

"This is why we need a new round of stress tests with more peer review and control on what national authorities are doing."

EU leaders agreed on a new review of the region's banks late last year as part of efforts to win back confidence of financial markets. The tests will begin in February.

Ireland's financial regulator stress-tested its two largest lenders - Bank of Ireland and Allied Irish Banks - last year to prepare them for loan transfers to a state-run "bad bank."

The Irish authorities said those domestic tests were tougher than a parallel Europe-wide review being carried out by the Committee of European Banking Supervisors, which Bank of Ireland and Allied Irish Banks also passed.

"Judging from our side, the Irish -supervisor underestimated the risks on the Irish banks' balance sheets, and the stress tests turned out not to be rigorous enough," said Bini Smaghi.