My conviction that Irish banks are in a mess has only grown stronger, now that Ireland's revealed the much-awaited results of its new stress test. According to the test, Allied Irish Bank (NYSE: AIB) will require more than half of the total $33.9 billion in capital to stabilize, while Bank of Ireland (NYSE: IRE) needs $7.3 billion of its own.

Unless it wants the Irish government to assume a majority stake of its ownership, Bank of Ireland needs to raise this amount privately by June. The bank is taking significant initiatives to retain its independence, but we still don't know whether they'll be enough to put the bank on stable footing going forward.

Can it raise the capital?
After selling off its fund administration business to Northern Trust (Nasdaq: NTRS) to generate capital, IRE has now put its Burdale lending business up for sale as well. The division offers asset-based lending in the U.K. and U.S.

After the Irish government released the stress test results, Bank of Ireland said that it would raise $5.9 billion in equity to take its core Tier 1 capital to more than 10.5%. According to the Irish Independent newspaper, the bank also expects to raise more than $1.4 billion of the total capital through a debt-for-equity swap. The bank will allow its investors to swap their 2.6 billion euros of junior bonds for equity. With these, IRE may once again prevent itself from becoming nationalized -- but for how long?

Back to square one
Even if Bank of Ireland can raise the required capital and assuage fears that the government might increase its stake, will it be able to sustain its growth? Its desperate asset sales may fill the huge capital holes plaguing Bank of Ireland right now, but it can't keep selling off parts of itself forever. At some point, I'm afraid the bank will have no choice but to take that government bailout.

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