The long road to Eurozone bank deleveraging RBS" analysts have revisited predictions made in 2011 that eurozone banks would have to shed €5.1tn of assets. The good news is they have managed to get through almost half of that, or €2.9tn, since May 2012. The bad news being there remains another €3.2tn to go, including €661bn from the biggest banks - of which Deutsche Bank, Credit Agricole and Barclays need the most capital, followed by Societe Generale and Commerzbank. The deleveraging picture, both to-date and in future estimates, varies a lot between different tiers of banks. Much of the reduction in assets so far has been through run-offs, but less so in the bigger banks. It's been uneven, too, between countries - lending activity in peripheral countries falling about €250bn while lending in the core has been stable or slightly higher, say RBS" Alberto Gallo and team: And what comes next will be uneven, too: We estimate Eurozone banks will have to cut €3.2tn more assets over the next 3-5 years. Large banks will cut €661bn of assets and generate €47bn of capital to comply with upcoming regulatory requirements. Small and mid-sized banks with less access to capital markets will delever mostly by reducing assets, by €2.6tn. Gallo et al expect the run-offs approach to continue overall, although larger banks will use other tactics: Large banks will likely use a combination capital raising and asset reduction to delever: we assume they will meet most (70%) of their deleveraging needs by raising capital. Gross capital needs will be €47bn for the Eurozone as a result, or €60bn including UK banks. Net capital needs fall to €29bn for the Eurozone if we assume banks retain half of the next three years" profits (€34bn incl. Here's more detail of RBS" estimates of what the bigger banks will do to meet capital requirements: For smaller banks, however, running down their loan books is the main likelihood, and it might not have the results most eurozone countries would like just now: Mid-tier banks do not pose systemic risk to the economy, yet they are vital for lending to SMEs in the periphery: they account for a large portion of the banking system (62.5%). Since they struggle to generate capital through earnings and broadly remain locked out of the capital markets, we assume they will meet 70% of their deleveraging needs through asset reduction. This implies total assets for the smaller banks will fall by around €2.6tn over the next 3-5 years. Yet regulations aside, European bank assets are still clearly outsized, the RBS analysts say: Eurozone banks are still 3.2x the size of their domestic economies, on average, much more than other developed countries like Canada, Australia or Japan, where the ratio averages around 2x, and larger than the US, where capital markets are more developed and banks are smaller than the economy. The prognosis in terms of economic effects seems rather grim, with Gallo and colleagues writing that public support programmes can only partially offset a fall in lending, while the expansion of bond markets "will take a very long time - and perhaps bonds will never really offset banks, in Europe." Related links: Eurozone banks need to shed €3.2tn of assets to meet Basel III - FT NPLs and lights in dark places - FT Alphaville