Deutsche Bank and other top European banks would need to raise billions of euros to meet a 9 percent core capital target and withstand hefty losses on sovereign bonds, leading to warnings of another damaging credit crunch.
Germany's flagship lender would need 9 billion euros ($12.33 billion) in fresh equity if a 9 percent core Tier 1 capital ratio is imposed, two people with direct knowledge of the bank's finances said on Thursday.
Deutsche Bank declined to comment, but in separate remarks the bank's chief executive Josef Ackermann said it would do all it could to avoid a forced recapitalization and added it had enough funds of its own to cope with a crisis.
Eurozone leaders are insisting that banks recapitalize, in an attempt to halt the eurozone crisis and shore up investor confidence.
The European Banking Authority, which is assessing banks' capital needs, is likely to mark down the value of banks' holdings of sovereign debt to market value and require lenders to hold a 9 percent core Tier 1 capital ratio, an EU source told Reuters.
That would leave European banks with a capital shortfall of about 260 billion euros, based on a two-year recession and applying current market prices to holdings of Greek, Irish, Italian, Portuguese and Spanish government bonds, according to Reuters Breakingviews data.
Royal Bank of Scotland, Unicredit, Deutsche Bank, BNP Paribas and Societe Generale would all need over 12 billion euros based on that data. Some 67 of 90 banks tested would need capital.
The high bar may not be based on stricter new Basel III capital rules and a contraction in balance sheets this year and retained earnings could also reduce the amount needed for several banks, however.
Analysts at Credit Suisse said a 9 percent capital level would leave banks in need of 220 billion euros, with RBS, Deutsche Bank and BNP Paribas most in need.
Banks are already attempting to sell assets and shrink their loan books to lift capital ratios. They could also be told to cut pay for staff and dividends for investors to preserve cash.
But those demands could force them to cut lending to companies and risk derailing economic recovery, bankers have warned.
"We need to find the right balance between stricter regulation of the financial sector and the impacts these have on the economy as a whole," Deutsche Bank's Ackermann said.
Ackermann, Germany's most high-profile banker, said it was doubtful whether a blanket recapitalization of European banks — a measure being considered by politicians in Germany and France — would help solve the sovereign debt crisis.
"It is not the capital position which is the problem, but the fact that sovereign debt as an asset class has lost its risk-free status," Ackermann told a conference in Berlin. "The key to the solution is therefore in the hands of governments, to restore confidence in the solidity of state finances."
Deutsche Bank's obligation to retain Greek bonds had cost it 400 million euros this year, he said.
The capital plans are subject to change, and face intense lobbying from banks and some countries who say it is too harsh. Proposals are expected to be presented to a meeting of European leaders on Oct. 23.
© 2015 Thomson/Reuters. All rights reserved.