A Europe-wide test of the safety of its banks risks becoming a sideshow as long as politicians struggle to contain the continent’s debt crisis and the detrimental impact on day-to-day funding for lenders.

Bankers say rapidly rising funding costs are a far bigger headache than Friday’s release of the results of the annual probe by the European Union’s banking watchdog, which is running the rule over 91 banks to see if they have sufficient capital.

“The collapse of market confidence in sovereign debt affects banks more than any regulatory  stress test,” said an investment banker who advises financial institutions.

“This is the markets  stress-testing the system, which is far more dangerous than any simulation by a regulator.”

Lack of clarity about how Europe plans to tackle the risk that countries such as Greece  will default under a huge debt burden has sent bond yields soaring, dramatically raising the cost for banks when issuing new bonds.

The drop in bond values also means banks may need to write down any portfolios of sovereign bonds  they hold. Bank shares have been losing ground as a result.

Depositor funding — from clients who put their money in a current or a savings account — is also under pressure, with withdrawals seen in countries such as Ireland  and Greece and a fight for deposits in Spain and elsewhere squeezing margins.

And other funding channels — such as the covered bond market, commercial paper, or asset-backed securities — are also starting to look increasingly shaky.

“Look at what’s happening in Italy . The rates are going up 30 to 40 basis points a day. That’s going to translate into a higher cost of funding,” said a second investment banker, whose clients are also financial institutions.