Nationalised German lender Hypo Real Estate (HRE) is set to fail a pan-European stress test designed to determine banks' financial health, according to unconfirmed reports by press agencies Reuters and Bloomberg.

Nationalised German lender Hypo Real Estate (HRE) is set to fail a pan-European stress test designed to determine banks' financial health, according to unconfirmed reports by press agencies Reuters and Bloomberg.

The rumours come ahead of the publication of the results of the strress tests on Friday. The Committee of European Banking Supervisors (CEBS) has said that the stress test will focus on 91 Continental banks, including 27 Spanish institutions, 14 in Germany and six in Greece, with the combined total representing 65% of the European Union banking sector.

ECB president Jean-Claude Trichet said the tests are designed to assess the banks' ability to ‘absorb possible further shocks’, such as a weak economic recovery and sovereign risk.

According to inside sources, HRE's failure to pass the stress test could see the German government having to pump more capital into the property lender, which almost failed in 2008 in the country’s biggest banking crisis for decades.

HRE is entirely owned by the German government via its financial market stabilisation fund SoFFin. To date, the bank has received about EUR 7.8 bn in state aid. Earlier this month,HRE said it planned to transfer up to about EUR 210 bn of bonds, property loans and other assets to a 'bad bank' scheme in the second half of the year. The move is designed to relieve the bank of toxic assets so that it can focus on normal banking activities.

HRE is said to be the only German bank set to fail the stress test. The other 13 banks are all expected to come through the tests, according to sources.