Europe's banks expect to be told to raise more capital under a Franco-German effort to solve the euro zone debt crisis after the state rescue of Franco-Belgian lender Dexia .
Dexia agreed early on Monday to the nationalisation of its Belgian retail bank and secured 90 billion euros ($121 billion) in state guarantees in a rescue that highlighted the need for other euro zone countries to strengthen their banks.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said on Sunday they would tackle Greece's woes and agree how to recapitalise the regions' banks by the end of the month, but they declined to reveal any details of their plan.
"We expect the EU to come up with a minimum core tier I (capital) level under certain stress scenarios and a higher one without any stress. Then banks will be asked to reach this level in a short period of time," said a senior banker in Germany.
Banks were not involved in talks yet with governments on likely capital needs, several bankers said, although options were being considered in case they need to act quickly.
But they were concerned at just how much more capital they will be called on to find. British Prime Minister David Cameron urged his euro zone peers on Monday to adopt a "big bazooka" approach to the crisis.
"If capital is to have any chance of stabilising the banks, it will need to be large: we would start with the IMF's 200 billion euros," said Alastair Ryan, analyst at UBS. This could see the euro zone governments owning 40 percent of the sector if such a sum was to come from the state, he estimated.
Under Dexia's rescue plan Belgium is to pay 4 billion euros to buy Dexia Bank Belgium, which has 6,000 staff and deposits totalling 80 billion euros from 4 million customers, and secured 90 billion euros ($121 billion) in state guarantees from France, Belgium and Luxembourg to underpin a 95 billion-euro loan portfolio which the bank is to now run down.
As part of the bank's break-up Dexia is also in talks to sell its Luxembourg arm to members of Qatar's royal family. The Qatari investors also bought Belgian bank KBC's private bank on Monday.
Dexia has a total global credit risk exposure of $700 billion - more than twice Greece's GDP - and its rescue has stoked investors' concerns about where other troublespots may lie.
The lender faced significant losses on its Greek government debt holdings, but, more significantly, it was shut out of wholesale funding markets, which it was highly reliant on to finance its long-term loans to municipal borrowers.
European banks have faced a significant deterioration in access to wholesale funding markets, which is likely to continue to drag on bank earnings, said Huw van Steenis, analyst at Morgan Stanley.
The European Central Bank last week stepped up its liquidity support, but may need to provide two to three-year funding support to help with the 1.7 trillion of bank funding due to be rolled over from 2012 to 2014, van Steenis said.
EURO ZONE FUNDING
There remain disagreements on how euro zone countries will fund any rescue effort, however. Paris wants to tap the euro zone's 440 billion-euro European Financial Stability Facility rescue fund for any recapitalisation of the banks, while Berlin is insisting the fund should be used as a last resort.
Banks are wary of making further cashcalls on their shareholders, however, as low share prices would make it painfully dilutive for existing investors, and private sector investors would be reluctant to ride to the rescue while the sovereign debt crisis persists.
France's banks are seen as among those most in need of capital and weekend reports said BNP Paribas and Societe Generale might agree to capital injections as part of a wider plan, although both banks denied any plans. Italy's Unicredit is also seen as in need of capital.
But Deutsche Bank is fighting hard against any blanket recapitalisation plans, saying it has decent capital levels and sound profitability.
"We will try to convince the government that not every bank needs fresh capital," a senior source at the bank said.
The Stoxx 600 Europe banking sector share index was flat by 1230 GMT, but has tumbled by a quarter since the end of June as euro zone leaders have failed to get to grips with the sovereign debt crisis.