The shortfall could be as high as 298 billion euros if the European Banking Authority (EBA) sets the core Tier 1 capital ratio at the high-end of 9 percent instead of 7 percent, Goldman said, and cut price targets on banks citing credit losses from exposure to sovereign debt and likely recapitalizations.  

In July, eight out of 90 European banks failed the EBA’s stress test to raise 2.5 billion euros ($3.5 billion) in capital, when the minimum pass level was set at 5 percent.

But recapitalization of banks will not have the capacity to address either the bank or the sovereign crisis, unless economic policy is aimed at steadying the value of sovereign debt, Goldman said in a note.

“Without the return of its “risk free” assets, the bank sector will remain destabilized in our view,” it added.

Capitalization of sovereign bond books may encourage a broader private-sector involvement, which is at the heart of the recent escalation of the crisis, but it is a fallacy to believe this to be sufficient to sustain second round effects of a sovereign default, the brokerage said.

It lowered its price targets on European banks, including Agricultural Bank of Greece, BBVA, Deutsche Bank and UniCredit.

Goldman cut its revenue outlook on European investment banks, including UBS and Credit Suisse, citing challenging capital market conditions in the third quarter, and expects declines in fixed income, equities and investment banking income.

The reduced demand J.P. Morgan Chase & Co. saw from its securities underwriting in the third quarter suggests that investment banks have been hit globally, Goldman said. 

At least three brokerages, including Citigroup, lowered their price target on J.P. Morgan on Friday, a day after the major US bank said quarterly earnings fell 25 percent, excluding an accounting gain, as European financial turmoil reduced demand for securities underwriting and acquisition advice.

Analysts at Citigroup lowered their price target on J.P. Morgan shares to $40 from $44, Robert W. Baird cut theirs to $46 from $52, while Nomura analysts reduced their target to $41 from $47.

All three brokerages have a “buy” or an equivalent rating on J.P. Morgan shares, which closed at $31.60 on Thursday on the New York Stock Exchange.