Paying more for deposits to prevent them from leaving, as banks in Ireland, Spain and Portugal are doing, will hurt banks' chances of rebuilding capital through earnings. Offering higher interest rates for retail bonds as Italian lenders have done will cut into interest margins.
'Not Sustainable'
"It's not sustainable for this type of pricing strategy to continue," Rabobank's Van Veggel said about the high rates Irish banks are offering for deposits. "But I don't think rates will start to come down until nervousness about European, and indeed global, issues calm down."
German and French banks are losing funds because they hold the most debt linked to troubled euro zone countries, according to Mark Schaltuper, an analyst at Business Monitor International, a London-based consulting group. Investors and creditors worry that German and French lenders will face losses on their holdings in the event of a default, he said.
"European policy makers are kicking the can down the road, waiting for banks to recapitalize slowly so they can take these losses over time," said Schaltuper, the firm's chief European analyst. "Until the debt situation in the periphery is sorted out, these funding troubles won't end."