The crisis hitting banks in the euro zone is expected to leave bruises on Gulf lenders as global credit gets tighter.
Many regional banks will experience funding problems as the fallout from the European turmoil spreads across the world, even among banks that have avoided buying bonds from the likes of Greece, Spain and other troubled sovereigns.
"What's most important are the indications for the funding markets," said Jaap Meijer, a financial analyst at AlembicHC.
"The UAE is the most vulnerable on the funding side."
Lenders including National Bank of Abu Dhabi (NBAD), First Gulf Bank and Emirates NBD may experience greater difficulty because of higher capital needs compared with other Gulf lenders.
The increased need for capital was sending many local banks scrambling to bolster reserves, bankers said.
"Banks are already moving and gearing themselves for a very tough market," said Sameh Al Qubaisi, the head of institutional and corporate coverage at NBAD's financial markets group.
The expectation is for constrained lending not only from local banks, but big international rivals may also reduce lending as funding costs increase, Mr Al Qubaisi said.
Funding issues may be mitigated by the use of Islamic finance in the Gulf, which has left banks less at risk from the troubles in the euro zone, Mr Meijer said. However, local banks' direct exposures to struggling European countries, such as Greece and Spain, may be dwarfed by exposures to big European banks such as BNP Paribas and Societe Generale, which lent heavily to many of the countries now facing default.
"The UAE banks will have very minimal direct exposures," said one treasury official at a UAE bank, who asked not to be named.
"But I won't be surprised to find a lot of European banks have exposure to European names," he said.
"And they're big enough that they'll create systemic risks."
Banks exposed to the euro zone's troubled peripheral nations, such as Greece and Spain, have experienced sharp swings in their market value in the past few days. This has been fuelled by a weakening global recovery and a growing sense that the euro zone cannot be saved from its debt woes.
Yesterday, BNP Paribas fell 5.4 per cent, Societe General declined 6.6 per cent and Deutsche Bank was down 1.9 per cent, after precipitous declines on Monday.
A number of banks named in a US lawsuit targeting sales of financial securities backed by subprime mortgages have also experienced sharp share price falls.
Royal Bank of Scotland, which was rescued by the UK government amid the global financial crisis, fell 12 per cent on Monday.
Benchmark interbank lending rates, known as Eibor, have remained at historically low levels even as liquidity becomes scarcer in the US. But analysts expect the rate charged by banks to lend to each other to start creeping upwards in the weeks ahead.
The faltering pace of the global recovery as Europe's banks encounter trouble may bring further challenges for Gulf states if oil prices fall.
Troubles at euro-zone banks may have a "modest impact" on corporate lending in the region, said Nick Levitt, the head of commercial banking at HSBC in the UAE.
"But the critical issue is what impact the financial challenges will have on the price of oil," he said, particularly if the price of oil dips below US$100 per barrel.
Brent crude futures have fallen 12.4 per cent since their peak in April to reach $111.02 yesterday.