Franco-Belgian financial group Dexia called an emergency board meeting on Monday after concerns about its exposure to Greece and a Moody's warning about its liquidity position raised pressure on Belgium and France to act.
Dexia shares tumbled 10 percent on Monday after Greece said its steps to avoid bankruptcy were falling short and credit agency Moody's raised concerns about the lender's access to funds.
The bank summoned board members for a board meeting late on Monday, a source familiar with the matter told Reuters.
Belgian and French finance ministers were also meeting together with other euro zone leaders on Monday evening. Belgium's Didier Reynders said the two states, both Dexia shareholders, would do all that was required to support their banks.
Whether it is Dexia or another, we are following the situation day-by-day, Reynders told reporters on arriving at the Eurogroup meeting in Luxembourg.
To help the banks... the first thing to do is to help Greece. If you resolve the Greek problem you are a long way along the path, he continued, adding that Dexia was not among the most troubled banks in the continent.
The mid-tier bank has neverthelss one of the largest exposures to Greece among overseas lenders and has been at the center of media speculation in recent weeks that it will split or needs another bailout, potentially from taxpayers.
According to a source familiar with the situation, Dexia's shareholders were keen to avoid a capital increase, but the group was likely to put a part of its French municipal lending unit Credit Local for sale.
Alex Koagne, analyst at Natixis in Paris said there could not be any demerger until capital was pumped in.
An injection is needed so the bank can withstand losses on toxic assets, he said.
He estimated Dexia needed 5 billion euros in additional capital to have a 9 percent common equity Tier 1 ratio under Basel III rules.
Dexia is not the only European bank facing a need for capital as regulations become tougher, profits sag and lenders face losses on sovereign bonds if the euro zone crisis is not resolved.
Banks face a 148 billion euro capital shortfall under a base case and a 227 billion shortfall under a stressed scenario, according to analysts at JPMorgan, who say Unicredit, Deutsche Bank, Lloyds, Societe Generale and Barclays each face a deficit of over 7 billion euros under its stressed scenario.
If banks are unable to raise the capital privately, government ownership of the sector could jump to 22 percent from 7 percent now, JPMorgan analyst Kian Abouhossein said in a note.
European bank stocks were down 2.6 percent by 1056 GMT, with French banks BNP Paribas, Societe Generale and Credit Agricole, each down over 3 percent.
Dexia, which received a 6 billion euro ($8 billion) bailout from Belgium, France and other major shareholders at the height of the financial crisis in 2008, held 3.8 billion euros of Greek sovereign bonds at the end of June and had a credit risk exposure to the country of 4.8 billion euros.
Dexia's market capitalization is only 2.5 billion euros, and its core capital is seen as insufficient to absorb big hits.
The company has taken a 338 million euro hit to cover a 21 percent loss on Greek sovereign debt maturing by 2020, part of a plan agreed by private sector investors in July.
But with market prices indicating investors could suffer a loss of 50 percent or more, Dexia's Greek bill could be more than 1 billion euros more.
Dexia Chairman Jean-Luc Dehaene said after a board meeting last week that neither Dexia nor its shareholders wanted the group to break apart and that it would continue to examine options to strengthen its balance sheet.
Dexia came unstuck when short-term credit dried up in the depths of the 2008 financial crisis, since a large proportion of its long-term lending to public authorities was financed by short-term borrowing.
Moody's said on Monday Dexia had experienced further tightening of its access to market funding.
($1 = 0.745 Euros)
(Additional reporting by Julien Toyer in Luxembourg, Steve Slater, Sophie Sassard in London, Julien Ponthus and Lionel Laurent in Paris; Editing by Rex Merrifield and Erica Billingham)