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Euro banks face ‘capital crunch’: PwC

Ralph Orlowski | Bloomberg via Getty Images

European banks will face a "substantial capital crunch" in 2014 thanks to new industry regulations, with capital shortfalls expected to be in the region of 280 billion euros ($380 billion), according to PricewaterhouseCoopers (PwC).

In a report labelled "De-leverage take 2," PwC said banks' capital reserves will face three pressures next year: the Basel III capital ratio requirements, leverage ratio requirements, and the European Central Bank's (ECB's) recent Comprehensive Assessment.

The company also warned that these challenges will be compounded by further regulation from individual countries. Unable to make up the capital shortfall by the traditional methods, banks will have to raise 180 billion euros ($244 billion) in new equity, PwC added.

(Read more: ECB warns on external risks to euro zone financial system)

Miles Kennedy, a financial services partner at PwC, said European banks were about to face a turbulent number of years, and that even those outside of the eurozone and the ECB's influence were not immune.

"For banks outside the scope of the ECB, the challenges are no less intense," Kennedy wrote. "A point reinforced by the recent exchange of letters between the U.K. Chancellor and Bank of England Governor on the subject of leverage.

"Although regulators will likely give banks some breathing space to execute their plans, the markets will apply more urgent pressure and this will drive banks to continue with their urgent de-leverage programmes."

(Read more: ECB sets tests to strengthen Europe's banks)

At the end of October, the ECB introduced new regulations which stated that euro area banks would have to hold capital equivalent to eight percent of their risk-weighted assets to protect them from further economic shocks.

ECB President Mario Draghi said: "A single comprehensive assessment, uniformly applied to all significant banks, accounting for about 85 percent of the euro area banking system, is an important step forward for Europe and for the future of the euro area economy."

Kennedy said that PwC expected 2014 to mark a shift from de-leveraging on the asset side – disposa and de-risking of assets – to de-leveraging on the liability side – capital-raising and restructuring.

(Read more: Stressful times for Europe's banks)

Kennedy said that the banks needed to act sooner rather than later to deal with this issue.

"For banks which fall under the ECB Comprehensive Assessment, even though the process will not conclude until late 2014, they should not defer action until then," he wrote. "Taking action sooner rather than later could mitigate the risk of market disruption or volatility at that time and avoid the need to resort to national back-stops."

He concluded: "As ever with major regulatory changes it will be painful, but in this case the pain will be in the transition rather than in the end state. And for some there is even a chance to take a less painful path, make a virtue of necessity, and stock up with capital."

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