Deutsche Bank is set to be the bank most affected, with profits hit hardest, by proposals to separate higher risk banking activities from traditional deposit-taking business, which are likely to affect about 20 banks, analysts said.
An EU advisory group, led by Bank of Finland Governor Erkki Liikanen, on Tuesday called for banks' traditional deposit-taking business to be legally separated from higher risk activities.
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The aim is to shield taxpayers from having to fund further bailouts and prevent the trading activity of a bank from toppling a group.
"We see the banks most impacted by these potential changes as the euro area investment banks, in particular Deutsche Bank and potentially some of the French banks, given a focus on trading book assets," said Amit Goel, analyst at Credit Suisse.
France's BNP Paribas and Societe Generale and large banks in Britain and Scandinavia are likely to be among the slew of other banks affected by the proposals from the EU committee, dubbed the Liikanen Group, analysts said.
Jan Pieter Krahnen, professor for banking at Frankfurt University and a member of the Liikanen committee, said about 20 banks may have to separate their trading activities, according to the conditions set by the committee.
The European Commission could write the first draft of legislation by the middle of next year although it may water down the proposals under opposition from some member states, such as Germany or France, who say the universal banking model was not to blame for the financial crisis, and any change in EU law and implementation could take years.
Banks with either trading assets of more than 100 billion euros ($129 billion) or 15-25 percent of their total assets would have to adhere to the new rules.
The proposals are non-binding, but will potentially be another drag on investment banking profitability, although the worst case scenarios of a full separation of investment banking or a stricter ring-fence similar to that proposed in Britain have been avoided.
That preserves the universal banking model and takes an approach closer to Volcker rules being introduced in the United States, analysts at J.P. Morgan said.
"More importantly, the ring-fenced trading entity can still fund through the holding company, and directly from the deposit bank at market rates, subject to some conditions, which is a relief," the analysts said.
Credit Suisse said in a note the potential changes did not appear to be factored into a strategic review that is underway at Deutsche Bank "and could lead to a further drag on group profitability". A separate trading arm would face higher funding costs.
Germany's largest bank plans to slash assets and cut costs as it looks to streamline operations to steer against the loss of profitability and tougher impending international banking regulations.
Other euro zone banks likely to be affected include Credit Agricole, Unicredit, Intesa Sanpaulo , Nordea, Danske Bank, Commerzbank and LBBW, and possibly Santander, SEB , Swedbank, KBC, Banca Monte dei Paschi, BBVA, ING, Erste Bank, analysts said.
It will also affect British banks such as Barclays, Royal Bank of Scotland, HSBC and Standard Chartered, although the UK needs to clarify how it will interact with its own proposals.
Bank lobby groups were critical of the report, saying that big structural change is already underway and there was a danger of regulatory overload. A raft of new rules are already hurting banks' earnings and leaving many unable to deliver a return above their cost of capital.